nulRpr 2003 Report Annual Annual Report 2003

Group Headquarters 10 Dunkeld Road Perth PH1 5TW Scotland T +44 (0) 1738 442 111 F +44 (0) 1738 643 648 www.stagecoachgroup.com 2003

STAGECOACH GROUP PLC Company No. SC100764

Contents 1 Highlights 11 Overseas Bus 26 Corporate governance 2 Group overview 12 Rail 30 Remuneration report 4 Chairman’s statement 14 Investments 35 Auditors’ report 6 Chief Executive’s statement 15 Corporate Social Responsibility 36 Accounts 8 Operating review 19 Finance Director’s review 75 Shareholder information 8 UK Bus 22 Board of directors 76 Five year financial summary 9 Coach USA 23 Directors’ report Stagecoach Group is a leading international transport provider, committed to developing innovative solutions across our operations

Highlights 2003

Business highlights Financial highlights

ı Continued profitability in all four key operating divisions ı Turnover »2,077m (2002 ^ »2,111m)

ı Good progress in restructuring Coach USA ı Total operating profit* »146m (2002 ^ »167m)

ı c. »300m of disposals announced post year-end ı Profit before tax* »113m (2002 ^ »107m)

ı Terms of new franchise at South West Trains finalised ı »575m of exceptional write-downs from Coach

ı Improved operational performance benefiting Rail Division USA review resulting in a statutory loss before tax of

ı Margin improvement at UK Bus »500m (2002 ^ profit of »42m)

ı Strong revenue and volume growth in New Zealand ı Earnings per share* 6.4p; up from 6.3p

ı Free cash flow up 18% to »218m

ı Net debt down »215m to »560m

ı Full year dividend 2.6p (2002 ^ 2.6p)

* excluding goodwill amortisation and exceptional items

1 UK Bus Coach USA Group overview 2003 Stagecoach has around 16% of the UK Coach USA is one of the largest providers Bus market making it one of the largest of motorcoach, charter, tour and bus operators in the UK. There are over sightseeing services in the United States. 90 depots across the country, principally The business is currently being restructured focused on providing scheduled passenger to concentrate on the substantial North services. East and North Central regions.

Turnover* »598.4m »603.0m Operating Profit* »67.0m »14.0m

No. of Vehicles 7,100 12,600` No. of Employees 17,900 10,600

* Turnover and operating profit figures are for the year ended 30 April 2003. Operating profit refers to operating profit before goodwill amortisation and exceptional items Vehicle and employee numbers are as at 30 April 2003 ` Includes driver-owned cabs # Stagecoach’s share

2 Overseas Bus Rail Investments Stagecoach New Zealand and Citybus Our Rail division comprises three subsidiary The Group owns 31.2% of the ordinary are the largest providers of scheduled bus operating companies: South West Trains shares of Road King Infrastructure services in New Zealand and on Hong (one of the largest UK rail franchises), Limited which operates over 1,000km of Kong Island respectively. There are also Island Line (Isle of Wight) and Sheffield toll roads throughout China. small bus operations in mainland China Supertram (which runs 29km of rail routes and the Group operates Fullers Ferries in across the city). Stagecoach holds a 49% equity stake in Auckland, New Zealand. The Hong Kong The Group also holds a 49% equity stake thetrainline.com which operates a rail and China operations were sold by in Virgin Rail Group which operates the Internet and call centre booking service Stagecoach in June 2003. West Coast Mainline and CrossCountry rail in the UK. franchises.

»51.0m »132.3m »413.6m »276.1m# n/a »11.0m# »11.2m »19.1m »38.2m »7.2m# »10.5m# »(4.3)m#

1,050 1,100 1,300 Road King Infrastructure 1,850 3,250 5,250 Limited

3 Stagecoach Group has made positive progress this year towards achieving its key strategic objectives despite challenging issues within the transport sector and a difficult economic environment.

Chairman’s statement 2003

Stagecoach Group has made positive progress this year towards prospects for the Group and, based on continued strong and achieving its key strategic objectives despite challenging issues stable cash flows and profits within the business, we will look within the transport sector and a difficult economic environment. to increase the dividend each year.

Across the Group, we are seeing strong cash generation from Our two key priorities in recent months have been the each of our four key operating divisions and all are trading restructuring of our Coach USA operations following a profitably. In the UK, our bus division has had a successful year comprehensive business review, and finalising the new South and is delivering increased operating margins with solid revenue West Trains franchise. Focused management action on both and passenger volume growth. We have agreed terms with the of these issues will deliver greater stability and certainty. Strategic Rail Authority (‘‘SRA’’) for a new three-year franchise at South West Trains, which is one of the UK’s largest rail At Coach USA we remain on course to deliver on our key franchises. We are awaiting final approval of this new franchise restructuring objectives within the 12 to 18 month timetable we agreement from the Government. Restructuring of our Coach set out in December 2002 and this will produce a smaller but USA division is progressing well. Earlier this month, we nevertheless substantial and more robust business. completed the disposal of our Citybus business in Hong Kong, while our New Zealand bus business continues to deliver strong We believe the financial and commercial terms we have agreed growth. with the SRA for the new franchise at South West Trains will deliver a good and predictable return for our shareholders. The Group’s strong cash flow generation, coupled with the favourable movement in exchange rates, has allowed us to Virgin Rail Group (in which we have a 49% interest) is reduce debt for the long-term benefit of the business. Net debt continuing to work with the SRA with a view to negotiating new reduced by »214.6m in the year ended 30 April 2003, from long-term commercial arrangements for both the West Coast »774.6m to »560.0m. Subsequent to the year-end we have and CrossCountry franchises. Both franchises are presently announced disposals with a gross consideration of approximately receiving SRA funding on the basis of a one year budget set by »300m. Of these proceeds, approximately »20m relates to the SRA for the period to February 2004. We remain confident deferred consideration and the remainder will initially be used that new franchise terms can be agreed that will secure to reduce Group debt. shareholder value for Stagecoach.

Turnover for the year ended 30 April 2003 was »2,076.6m Our UK Bus operations are producing revenue and passenger (2002 ^ »2,111.4m). Total operating profit before goodwill volume growth, most notably where we work closely with amortisation and exceptional items was »146.4m forward-looking local authorities. We have been particularly (2002 ^ »166.6m). Earnings per share on an equivalent basis successful in the London market. We are also pleased that the were up at 6.4 pence (2002 ^ 6.3 pence). Government has taken forward our ‘‘Kick Start’’ proposals for targeted funding to support the introduction of new services The Board of Directors is recommending that the total dividend and help reinvigorate the UK Bus network. for the year is 2.6 pence per share (2002 ^ 2.6 pence). This comprises the interim dividend of 0.8 pence (2002 ^ 1.3 pence) In the Overseas Bus division, performance at our New Zealand and a proposed final dividend of 1.8 pence per share businesses, where we are seeing strong growth, continues to be (2002 ^ 1.3 pence). The Board has firm confidence in the future very satisfactory. Citybus, our Hong Kong bus operation, has

4 Robert Speirs Chairman

been an excellent investment for the Group since 1999. However, I was happy to accept the invitation, in December 2002, to the Board received an approach for the business and felt it was continue as Chairman of the Board. We have been working appropriate to review the strategic options for Stagecoach Group closely to refocus the company and I am confident Stagecoach in the region. In view of the limited opportunities to develop Group has a dedicated senior management team and a significantly elsewhere in other Pacific Rim countries and the committed Board that will ensure the Group continues to thrive long-term prospects for the business in Hong Kong, we believe and deliver shareholder value. the offer was a good one and that selling the business at this time was in the best interests of shareholders.

We have a clear strategy for the Group and are on schedule with our sales programme and restructuring at Coach USA. The sale of Citybus has put the Group in a strong financial position, further ROBERT SPEIRS de-risking the Group’s portfolio, and will allow management to Chairman focus on developing our UK bus and rail businesses, a smaller but 25 June 2003 more robust North American business and our successful New Zealand operations. The Group continues to be a leading international transport company with a strong portfolio of cash generative businesses.

Following the business review in North America, I was delighted to announce six months ago that Brian Souter had taken up the position of Chief Executive on a permanent basis. His energy and entrepreneurial vision have been the driving force behind the Group and the considerable work he has done in restructuring our US operations is laying firm foundations for a stronger North American business.

5 Management has been clearly focused on the twin priorities of restructuring Coach USA and securing the new franchise at South West Trains. I have been particularly pleased at the progress we have made and this will give greater certainty to shareholders.

Chief Executive’s statement 2003

Management has been clearly focused on the twin priorities of awaiting final approval. Together with the current one-year restructuring Coach USA and securing the new franchise at South extension, this would result in a franchise for the period until West Trains. I have been particularly pleased at the progress we February 2007. This will cement our leading position within the have made and this will give greater certainty to shareholders. UK rail market and combines the right balance of risk and return for our shareholders. We are seeing steady performance benefits across the Group as a result of our concentration on operationally led management. Our Rail division has delivered a strong operating profit for the I believe this has reinvigorated the entrepreneurial approach of year. At South West Trains, our concentration on driving up management and we are well placed to deliver growth in our operational performance has resulted in significant improvements operations, despite the worldwide economic slowdown. and we are progressing well with the planned introduction of our new »1bn Desiro train fleet. At Virgin Rail Group, the business is I am pleased to report that we remain on course to restructure benefiting from the focus on service delivery and significant our Coach USA division and to meet our strategic aims for the investment in new trains. The replacement of the entire business within the 12 to 18 month timetable we outlined in CrossCountry fleet has been completed with the introduction of December 2002. We have already announced the disposals of new Virgin Voyagers, while the first of the new state-of-the-art Coach USA’s Transit division, New England, West, and South Pendolino trains are also in service. Central regions and a number of its taxi businesses. Together, the gross consideration for these amounts to over US$220m. Network infrastructure difficulties remain a concern, however, and we have implemented a range of measures to mitigate the We intend to retain the North East and North Central regions, effects on our operation as well as working closely with Network which together accounted for around one-third of Coach USA’s Rail and the Strategic Rail Authority. turnover in the year ended 30 April 2003. We are developing the businesses within the Coach USA portfolio that perform well and Our UK Bus division, the traditional core of the Group, is have predictable revenue streams, as well as reducing our performing well. We are benefiting from revenue and passenger exposure to charter and leisure-related businesses. In addition, we growth in provincial towns where we are working in partnership have successfully retained key management and further reduced with forward-looking local authorities. We have been particularly our corporate and regional overhead base. Trading at Coach USA, successful in the London market, where we have retained and as we predicted, remains challenging and we have not seen any won a number of tenders. New tenders and the operation of major improvement in the trading environment. Nevertheless, additional vehicles on behalf of Transport for London have Coach USA remains cash generative and profitable. We have added »14.6m in revenue in the year ended 30 April 2003. many strong performing businesses in the residual Coach USA Passenger volumes in London are up 8.8% and we see further portfolio and we are continuing to redeploy existing assets to opportunities for growth following the introduction of maximise asset utilisation and to eliminate unnecessary capital congestion charging earlier this year. Operating profits and expenditure. margins for the UK Bus division have risen, despite increases in pension and other labour costs. We have now agreed financial and commercial terms with the SRA for a new three-year franchise at South West Trains. The We are taking an industry lead in generating new ideas and deal, which has been recommended to the Department for believe our ‘‘Kick Start’’ proposal, which is now being taken Transport and the Treasury by the SRA Board, is currently forward by the UK Government, can benefit communities across

6 Brian Souter Chief Executive

the country. The proposal is that the Government sets aside inability to grow profit without very significant investment or funds, which are used to give short-term impetus for the critical mass synergies. While the outbreak of Severe Acute introduction of new services with the aim that such services Respiratory Syndrome (‘‘SARS’’) earlier this year continues to would become commercially viable within three years from their impact the profitability of the Hong Kong business, our commencement. It can deliver more comprehensive bus services, assessment of the sale was based on a long-term view of the reduced road congestion, better value for the taxpayer with profitability and capital requirements of the business and not the important environmental and social inclusion benefits. As well as immediate trading conditions. The market for franchised bus bidding for Government funding in this area, we will continue operations is competitive and the purchaser already had an with our own ‘‘Kick Start’’ programme of investment in buses for interest in a significant franchised bus operation. The proposed routes identified as having organic growth potential and we are combination will benefit from synergies and economies of scale looking at the development of a number of new products and and this will give a solid platform for the further investment that ideas targeted for growth in the next twelve months. is required in the Hong Kong franchised bus market. On that basis, we believe the sale of Citybus was in the best interests In New Zealand, where we are the biggest bus operator, our of the business and Stagecoach shareholders, and it will allow operations have delivered further strong growth. We continue to Stagecoach management to continue to deliver our strategy work in close partnership with national and local government to as a leading international transport provider. improve bus services, investing heavily in our operation. ‘‘Kick While still early in the new financial year, the Group has started Start’’ pump-priming funding has helped enhance services on key the year well and is trading in line with our expectations. corridors and bus passenger growth in Auckland has continued to be strong. In addition, we remain actively interested in running I am delighted with the contribution our people across the globe the suburban rail networks in both Wellington and Auckland. have made in meeting the challenges of the past year and I would like to thank them and our customers for their continued Under our ownership since 1999, our Hong Kong Citybus support. I am certain we can deliver better services, more value operation has produced strong organic growth in passenger to shareholders, and continued security for our employees. volumes and a significant reduction in operating costs. Following an approach for the business, we reviewed the strategic options for Stagecoach Group in the region. It was our view that there were limited opportunities to develop significantly elsewhere in other Pacific Rim countries and the long-term prospects for the business in Hong Kong were uncertain. A number of factors were BRIAN SOUTER assessed in coming to a decision, including the future economic Chief Executive climate in Hong Kong, the growing levels of regulation and the 25 June 2003

7 ‘‘I’ve looked after travelling passengers for 10 years now and know that, above all, our customers value good communication. If services don’t run smoothly, they like to be kept informed. Keeping our passengers happy is crucial to our success.’’ Chris Pearce Standards Controller UK Bus

Operating review 2003

UK BUS Outside London, total passenger volumes have increased by Stagecoach continues to be one of the leading UK bus operators, 0.4%. The trend in passenger volumes varies significantly by with a 16% share of a highly competitive market. Our UK Bus geographical area. We have initiatives in place to encourage business, the traditional core of the Group, remains a strong further growth and we have been particularly successful in source of cash flow. As one of the biggest bus operators in the increasing volumes in areas where congestion is causing some UK, we are at the cutting edge in developing new and innovative commuters to switch to using public transport. products and we are committed to playing a key part in Our major operation at Ferrytoll Park and Ride in Fife, Scotland, achieving the Government’s objectives of increased use of public which at peak times runs buses every five minutes into transport and greater integration. Edinburgh, has seen passenger volumes increase by 30% in the Turnover in our UK Bus division has increased by 5.4% to »598.4m past year. The Scottish Executive has approved additional (2002 ^ »567.9m). Operating profit was »67.0m,* compared to investment to double the size of the facility to 1,000 car parking »62.7m in the previous year, and this is after taking account of spaces. Successful park and ride operations are also running in increases in insurance costs and labour costs, including an increase Cambridge, Canterbury and Exeter. in pension costs. The operating profit figure is stated after the financing element of vehicle operating leases, which amounted to A new turn-up-and-go network and fleet of 40 easy-access »0.5m. This represents an operating margin of 11.2% (2002 ^ low-floor buses was introduced in Cambridge city centre around 11.0%) and reflects the benefits from a wide range of local 18 months ago and we are still achieving annual passenger initiatives to grow revenue, despite a continuing fall in the cost of growth of around 17%. This has flowed through to on-bus car ownership. Across the UK, we have invested in new buses with revenue and further development of the rebranded Citi network a total capital value of »40.7m during the year to develop our is planned later this year. We have seen strong levels of on-the-road product. Total passenger volumes across our UK Bus passenger growth in other areas, including Manchester and business have increased by 3.2%. Kingston-upon-Hull.

In London, where we have a 16% share of the market, we have In certain rural areas, where traditional bus services do not increased our fleet size by 10% and recruited 200 more drivers suit the needs of the community, we are working with local in the past year. Some 88.5% of our London fleet is now low authorities to deliver transport solutions. Known as demand floor, with a significant proportion of vehicles having been responsive transport, these taxi-bus style services run on a replaced within the last five years. Passenger growth in London skeleton timetable, and also take pre-booked pick-ups arranged was 8.8% for the year and we have purchased new depot space via call centres, helping to boost social inclusion. We are already at Stratford for future expansion. helping run similar services in Strathclyde, Hampshire and In order to meet the extra demand generated by congestion Newcastle, with some systems using sophisticated on-board charging, we have negotiated improved margins and enlarged computers and the latest Global Positioning Systems technology. contracts to operate buses on behalf of Transport for London Stagecoach is working in partnership with the devolved (‘‘TfL’’), introducing 100 new vehicles. In partnership with TfL, we administrations in Scotland and Wales on the successful launched the UK’s first 24-hour, round-the-clock articulated bus operation of the free concessionary fares schemes. We also service in London in March 2003. A fleet of 35 state-of-the-art worked in partnership with Manchester City Council and Greater Mercedes ‘‘bendy buses’’, each capable of carrying up to Manchester Passenger Transport Executive to deliver an enhanced 140 passengers, is now running through the West End of London. network for the Commonwealth Games last year. Over 500,000 Passengers using the route buy tickets in advance from retail passenger journeys were made on the successful free shuttle bus outlets and roadside ticket machines. This cashless operation not operation to and from the main stadium. only helps improve journey times, but also provides added security. Our emphasis continues to be on strong local marketing, simplified fares and ticketing, and improved information, *Operating profit of a particular business unit referred to in the operating review is operating profit before restructuring costs, goodwill amortisation and including the introduction of online access to timetables for all exceptional items. Stagecoach bus services. An increasing number of customers are

8 ‘‘My proudest moment was when we won the Bus Industry Marketing Project of the Year Award this year. Our team’s priority is to provide existing passengers with up-to-date, useful information and to stimulate passenger growth through innovative promotions.’’ Karen Best Marketing Manager UK Bus

Operating review 2003

using the Internet to access information about our services and this year. We have more Stagecoach-funded schemes planned for pay for specific tickets, particularly in the student market. The the coming year. innovative Unirider campaign, targeted at the sizeable student Stagecoach is supporting Government moves to improve market, has resulted in further growth in Manchester this year, integration between rail and bus travel. We have a growing with an encouraging shift towards annual ticket sales that network of bus links across our South West Trains operation, generate increased loyalty among our customers. The campaign ^ allowing passengers to buy a combined bus and rail ticket, and which picked up the UK Bus Industry Award for Marketing at the we fully support the Government’s PlusBus through-ticketing end of 2002 ^ is also being rolled out in other student centres, initiative. We are also working with the Government and local such as Newcastle, Warwick, Lancaster and Aberdeen with further authorities to introduce the benefits of smartcard technology to areas to be targeted at a later date. Around 15% of our total buses in areas such as Aberdeen, Nottinghamshire, South Wales student revenue in Manchester is achieved via our and Manchester. stagecoachbus.com website. A new improved Internet sales system is being introduced in the autumn of 2003. We firmly believe the future of the bus industry ^ and, ultimately, the long-term interests of passengers ^ is best served Sophisticated research and marketing techniques pioneered by by operators, government, local authorities and customers the retail industry are being used by Stagecoach to attract more working together to improve our public transport system. people to public transport. Lifestyle information from sources Passenger growth, improved reliability and reduced congestion in such as the census and economic trends data is being used to our towns and cities can all be achieved without the need for help understand more about our customers and how they make increased regulation. We believe that improved partnerships with decisions. Customers can now be profiled, segmented and local authorities and quicker progress on bus priority measures targeted on a geographical basis and the information used to are key in unlocking passenger growth and achieving the tailor direct marketing campaigns, including telemarketing. In trial government objective of modal shift. areas in Perth and Grimsby, between 7% and 9% of customers targeted have switched to the bus, well above the normal 2% conversion rate for these campaigns. COACH USA Coach USA is clearly focused on delivering the 12 to 18-month Stagecoach is a frontrunner within the UK bus industry in strategy to restructure the business. This strategy will produce a supporting and developing new approaches to bus provision to stronger business base, ensuring greater management and draw increasing numbers of passengers to public transport. geographic focus.

At national level, Stagecoach has taken an industry lead by The trading environment, however, continues to be challenging as presenting plans to the Government to help reinvigorate the UK the uncertain global economic climate continues. Coach USA’s Bus network. We believe our ‘‘Kick Start’’ proposal for targeted turnover for the year was »603.0m, compared to »682.3m in the funding to support the growth of existing services can benefit previous year. Operating profit was »14.0m, compared to »38.4m communities across the country, delivering more comprehensive in 2002, representing a reduction in operating margin from 5.6% bus services, reduced congestion and better value for the to 2.3%. The reduction in operating margin reflects a fall of 0.4% taxpayer, with important environmental and social inclusion in like for like revenues in our coach and bus operations, benefits. Our pilot project in Perth, Scotland, has seen substantial increased insurance costs and a significant fall in taxicab passenger growth in the first three years. We estimate that utilisation and sales. Action is continuing to maintain strict »140m of Government funding could deliver 2% passenger controls on our cost base and improve operating efficiency. growth per annum across the whole UK bus network over a three-year period. The ‘‘Kick Start’’ proposal has received In December 2002, we announced the way forward for Coach widespread support from politicians and from across the UK Bus USA, following a detailed six-month business review. As a result industry. Both the Department for Transport and The Scottish of the review, in our interim results for the six months ended Executive are now working on the details of a ‘‘Kick Start’’ 31 October 2002, we wrote down the carrying value of Coach initiative and funding could be earmarked for pilot projects later USA by »575.0m, to »376.9m excluding net debt and tax. After

9 ‘‘We really value our customers in Chicago and I like to give them a friendly and reliable service.’’ Clint Malcome Driver Coach USA

Operating review 2003

taking account of goodwill amortisation and exchange rate seeing passenger growth as a result of new commercial initiatives movements, the equivalent carrying value of Coach USA as of and partnerships with other stakeholders. 30 April 2003 was »330.5m. Our Shortline business is working in partnership with Rockland Key actions being taken at Coach USA are to: County, the New York State Department of Transportation and the New York Thruway Association to run minibuses on a special ı Concentrate on the North East and North Central regions of route that bypasses the toll barriers at the Tappanzee Bridge. The the USA; initiative, which provides faster journeys for passengers and less ı Focus on large business units and predictable revenue streams congestion at toll barriers, has achieved passenger growth of including commuter (line runs/scheduled services) and contract more than 24% since May 2002. The contract has recently been services; extended, along with many others with Rockland County. ı Focus on businesses which perform well and where Stagecoach has proven management experience; Further growth is being achieved with our popular New York

ı Reduce exposure to charter and leisure-related businesses; Sightseeing product, which runs high-quality double decker

ı Reduce corporate and regional overhead base in line with the vehicles on Manhattan. In February 2003, we launched the downsizing of the business; and Showbiz Insiders Tour, which takes in the major entertainment locations in New York City. In April, we added Philadelphia to the ı Retain and focus key management. list of day-trip locations running from New York City, working in We remain on target to complete the restructuring as planned partnership with Amtrak, the Philadelphia Convention and and are proceeding with discussions for the sale of various parts Visitors Bureau and other organisations. of Coach USA. We have already announced the sale of two- thirds of the businesses we planned to dispose of for a combined During the last six months, we have re-branded our Olympia consideration of over US$220m. Trails fleet, which is the primary bus operator from Newark International Airport to New York City. As well as presenting a Work to restructure the taxi division, where financial new, fresher image to customers, round trip fares were reduced performance in the first six months of the year was particularly and a ‘‘kids ride free’’ programme was implemented to entice disappointing, is well underway with a number of businesses additional ridership. In addition, in March 2003, Olympia already sold. The management team has been strengthened and re-instated its bus service to downtown New York for the first specific action plans for improvement are being implemented in time since September 11, 2001. The return of this service ensures the two largest and poorest performing taxi companies. We will essential airport connections for the communities of lower consider opportunities to exit the taxi market in the next Manhattan and contributes to the continuing regeneration of 12 months. the area.

As a result of these measures, we are confident we will In the North Central region, the Chicago sightseeing market has significantly reduce the level of our leisure-dependent operations. returned to pre-September 11 levels following the introduction of Despite the continuing uncertain US economy, we believe that 75-seat double-deckers to complement our already strong Trolley these changes will result in a smaller but more predictable Tour service. In addition, our Chicago-Airport Express scheduled business in North America with a sustainable earnings profile. service operation saw continued ridership growth of 14% above pre-acquisition results, due to an enhanced schedule, improved We have many strong performing businesses in the residual equipment and a focused marketing strategy. In the Wisconsin Coach USA portfolio and we are continuing to redeploy existing market, we will have further revenue growth from August 2003 assets to maximise asset utilisation and to eliminate unnecessary as a result of the renewal of an important contract with the capital expenditure. Work is also ongoing to target opportunities Milwaukee Public School District. arising out of consolidation in the fragmented US transport market or where there are potential complementary acquisitions. In March 2003, Coach USA acquired Lafayette and Greenville Bus While trading conditions continue to be challenging, we are Company, a line run company located in Jersey City, New Jersey.

10 ‘‘A customer’s first impression of Stagecoach is down to the driver. I try to give them the best and longest lasting impression possible, getting them to their destination on time.’’ Casey Meyer Driver Stagecoach New Zealand

Operating review 2003

There are many synergies between the two operations and the trips for spectators attending the America’s Cup yachting regatta »1.4m acquisition provides Coach USA with a strong foothold in generated additional revenues. Fullers is also working closely with the Jersey City and Bayonne markets. a special purpose company owned by the city councils in Auckland to plan a major upgrade programme for ferry wharves OVERSEAS BUS and terminals. Our Overseas Bus division continues to perform satisfactorily. On 9 June 2003, we announced the sale of Citybus to Delta We remain the largest provider of scheduled bus services in Pearl Limited, a 100% indirect subsidiary of Chow Tai Fook New Zealand. Strong public and government support for Enterprises Limited, the privately owned company of the Cheng passenger transport continues to underpin our New Zealand Yu Tung family and the major shareholder in New World bus business. Development Company Limited which in turn has an interest in Turnover for the year in Overseas Bus was »183.7m, compared New World First Bus Services Limited, one of Hong Kong’s major to »194.7m in the previous year. Operating profit was »30.3m, bus operators. The sale was completed on 23 June 2003. compared to »33.4m in the previous year. This represents an operating margin of 16.5% (2002 ^ 17.2%). The reduction in The gross consideration for the disposal was HK$2,200m operating profit reflects the disposals of operations in Australia (approximately »176m). The net cash amount received by and Portugal, movements in foreign exchange rates applied in Stagecoach was HK$1,646m (approximately »132m) which translating overseas profits to sterling and the impact of SARS represented the gross consideration less the amount of net third and a sluggish economy on our Hong Kong operations. party debt as at 30 April 2003, being HK$554m (approximately »44m). The purchaser assumed all of the net third party debt of The results for Overseas Bus include turnover in respect of Citybus. Citybus of »132.3m (2002 ^ »148.6m) and operating profit of »19.1m (2002 ^ »25.2m). The purchaser will also assume capital commitments of approximately HK$239m (approximately »19m) relating mainly Our bus operations in New Zealand are centred on the country’s to the completion of a new depot for Citybus at Chaiwan in two largest metropolitan areas, Auckland and Wellington. We are Hong Kong. closely involved with national and local government in assessing how best to organise and develop bus services. The acquisition of Citybus has been successful for Stagecoach and has delivered good financial returns. Under our ownership Stagecoach New Zealand continues to work closely with regional since 1999, the business has produced strong organic growth in and city councils to improve services and introduce new bus passenger volumes and a significant reduction in operating costs. priority measures. The successful Quality Partnership Agreement with Wellington Regional Council and Wellington City Council On receiving an initial approach about the possibility of disposal was renewed during the year for a further four years. A similar the Board reviewed the strategic options for Stagecoach Group in agreement exists with Auckland City Council and informal the region in view of the limited opportunities to develop working parties operate in other areas. significantly elsewhere in other Pacific Rim countries and the In Auckland, Stagecoach has continued to enhance bus service long-term prospects for the business in Hong Kong. frequencies, using ‘‘Kick Start’’ pump-priming funding provided The Board believes that a combination of the uncertainties about by the Government and Auckland Regional Council. Individual the economic climate in Hong Kong, the growing levels of service improvements this year have been concentrated on peak regulation to which the business is becoming subject and the period commuter services, including further enhancements to the inability to grow profit without very significant investment or key bus corridors that have seen passenger growth generated by critical mass synergies required it to take very seriously the previous ‘‘Kick Start’’ funding. approach and to negotiate terms which were in the best interests of Stagecoach shareholders. Stagecoach New Zealand also runs Fullers Ferries based in Auckland, which operates ferry services. Ferry passenger volumes The outbreak of Severe Acute Respiratory Syndrome (‘‘SARS’’) grew by 6% over the year and a successful programme of special earlier this year continues to impact the profitability of the Hong

11 ‘‘I passionately believe that our customers should always get the best service they have ever had ^ not only when the service is running well but also in times of disruption.’’ John Downes Customer Care South West Trains

Operating review 2003

Kong business but the Board’s assessment of the disposal has (2002 ^ »31.0m), representing an operating margin of 9.2% (2002 been based on a long-term view of the profitability and capital ^ 7.7%). This includes liquidated damages of »8.5m in relation to requirements of the business and not the immediate trading late delivery and reliability of new Class 458 trains. Rail profits are conditions. stated after the costs of bidding for new franchises.

Citybus has two franchise operations, one on Hong Kong Island Passenger volumes at South West Trains increased by 2.1%, or and the other operating to and from the international airport. 0.9% after excluding the periods affected by industrial action in These franchises expire in June 2006 and May 2013 respectively. the prior year. The business will require significant new investment in property and vehicles to ensure that the franchises are retained and Financial performance has benefited from significant operational renewed. The purchaser already has a relationship with a improvements at South West Trains. However, infrastructure significant franchised bus operation in Hong Kong and the performance in the UK remains a major concern as the backlog proposed combination can benefit from synergies and of maintenance work continues, costs continue to rise and economies of scale which will give a solid platform for any Network Rail has indicated that it is likely to be 2008-09 before further investment that is required in the Hong Kong franchised punctuality returns to the levels achieved before the incident at bus market. Hatfield two years ago.

The Board therefore believes that the sales price represents fair A reliable, right-first-time railway is a top priority for us as a value for Citybus and that the disposal is in the best interests of major train operator and a key requirement for our customers. Stagecoach shareholders. Despite the difficulties we face with network infrastructure, we are working very hard to mitigate the effects on our operation. The transaction will reduce Group consolidated net debt by We have reviewed the resourcing and control of our services to HK$2,200m (approximately »176m) in the year ending 30 April improve their resilience. An integrated control centre is planned 2004. It will also reduce Group consolidated capital at Waterloo where South West Trains and Network Rail commitments by HK$239m (approximately »19m). personnel will work together to ensure that real-time management of the network is properly co-ordinated and The consideration is broadly in line with the anticipated book disruption to passengers is minimised. We believe this will value of the net assets at completion and accordingly, the demonstrate the benefits of vertical integration on the railways. transaction will not result in a material gain or loss on disposal in South West Trains is also working in partnership with Network the consolidated accounts of Stagecoach Group plc. Sales Rail and infrastructure contractors Balfour Beatty to address proceeds will initially be used to reduce the Group’s outstanding infrastructure maintenance issues. debt. The disposal will result in a small reduction in annual earnings per share. We are working closely with the SRA on the new strategic direction for our railways. Recent SRA announcements outlining the future direction of the industry, the focus on performance RAIL and the steps already taken to reduce congestion on the rail Stagecoach Group continues to hold a significant share of the network, have been welcome. The introduction of new timetable UK rail market, including South West Trains, which is one of the changes from September 2003 will help considerably in further largest UK rail franchises, Island Line and Sheffield Supertram. In reducing the effect of disruption on the network. addition, our rail business includes our joint venture, Virgin Rail Group, which operates the West Coast Main Line and Performance initiatives at South West Trains have helped deliver CrossCountry franchises. a notable increase in train punctuality on suburban services over the last year and the picture has also improved for the mainline Turnover for our wholly-owned rail subsidiaries in the year was up services. Fleet reliability measures have also assisted in reducing 2.7% at »413.6m (2002 ^ »402.8m). Operating profit was »38.2m the number of delays.

12 ‘‘The safety of our trains is always my top priority. It’s my job to ensure that our drivers have everything they need to run a safe, reliable train service for our passengers.’’ Sharon Smith Head of Drivers South West Trains

We expect further improvements in quality and performance as Marketing activity has focused on developing our off-peak leisure more new trains are delivered at South West Trains and Virgin market where we see a number of opportunities for increased Rail Group. revenue. We have worked with the Mayor of London in promoting train travel to London and its nearby attractions. South West Trains Strong promotion of our most popular products has had a We have achieved a major step forward at South West Trains significant impact and trials are also underway of new products, with the completion of negotiations with the SRA and the including a First Class ‘‘off-peak’’ saver ticket aimed at longer- agreement of financial and commercial terms for a new franchise. distance travellers. We also have a substantial new leisure database following our summer 2002 Million Ticket Giveaway. The new three-year franchise, which is awaiting Government This has allowed us to promote our products more directly and approval, places responsibility for funding and delivering effectively, as well bringing thousands of new and lapsed users infrastructure projects with the SRA, leaving South West Trains back to train travel. The number of revenue protection staff has to focus on delivering a better train service to passengers. been increased, particularly at Waterloo Station, as part of a We believe it is a pragmatic agreement that reflects the successful campaign to target ticketless travel and this is having organisational and operational reality of the rail industry. It will a positive impact on revenue. bring certainty and stability to our rail portfolio and we believe it is an excellent deal for government, our passengers, our Island Line shareholders and our people. Stagecoach Group’s contract to operate the Island Line franchise on the Isle of Wight runs until September 2003. We are currently We are now working hard to deliver on our promises to participating in single party negotiations with the SRA regarding improve the quality of service to our customers with the a new franchise that would run concurrently with the new South introduction of a »1 billion fleet of new Desiro trains and a West Trains franchise until February 2007. comprehensive refurbishment of our suburban Class 455 trains. The new Desiro trains are on schedule to be delivered into passenger service later in 2003 and driver training programmes Sheffield Supertram are well advanced. Our Supertram operation in Sheffield ^ which includes three routes covering 29 kilometres across the city ^ continues to Safety remains South West Trains’ highest priority and our safety generate increased patronage. Total passenger numbers for the performance during the year was among the best in the rail year ended 30 April 2003 were 11.5 million. industry. However, we are not complacent and we continue to monitor and improve our internal systems, as well as investing in Since Stagecoach took over the operation over five years ago, the safety of our rolling stock. We have now almost completed performance has improved and passenger volumes have grown by the fitting of the Train Protection Warning System (‘‘TPWS’’) to around 25%. In April 2003, the Group took over responsibility for all our trains, and we believe it offers enormous benefit and maintenance of both the Sheffield Supertram system and the reassurance to passengers. trams, making the light rail network a vertically integrated operation. We remain committed to giving our customers the best service they have ever had and have invested in a new Customer Virgin Rail Group Communications and Security Centre at Wimbledon. A new Our share of Virgin Rail Group’s turnover for the year amounted customer information system, fully implemented across the to »276.1m (2002 ^ »261.2m) and our share of operating profits network in partnership with Network Rail, provides audible and before exceptional items was »7.2m (2002 ^ »10.8m). Passenger visual information to customers about trains at our 176 stations. volumes for the year are 4.7% above the prior year. The 24-hour control centre is the hub of our information and security links, monitoring the new customer information system, Virgin Rail Group is continuing to work with the SRA with a view CCTV cameras and Help Point calls. to negotiating new long-term commercial arrangements for both

13 Operating review 2003

the West Coast and CrossCountry franchises. Both franchises Our share of trainline’s operating losses has reduced from »4.4m are presently receiving SRA funding on the basis of a one-year to »4.3m. budget set by the SRA for the period to February 2004. We remain confident that new franchise terms can be agreed that Road King Infrastructure will secure shareholder value for Stagecoach. Road King Infrastructure is one of the leading highway investors and developers in China. Based in Hong Kong, it operates around Eighteen of the new tilting Pendolino trains, built by Alstom, 1,000 km of road tolls throughout China on over 20 toll roads have now been delivered and the first has gone into passenger and bridges in partnership with the Chinese Provincial Authorities. service on the West Coast Main Line. When the programme is Following the mandatory conversion of our preference shares on completed, a fleet of 53 state-of-the-art Pendolinos will be 12 June 2003, Stagecoach now has a 31.2% holding in Road regularly linking London Euston to Manchester, Liverpool, the King. West Midlands and Glasgow. The Group results for the year ended 30 April 2003 include our Virgin CrossCountry, which links 110 towns and cities and carries share of Road King’s results for the year ended 31 December 16 million people a year, introduced a brand new clock-face 2002. Our share of operating profits for the year was »10.5m timetable in September 2002 with a substantial increase in (2002 ^ »12.9m). The fall in profitability reflects a reduction in services featuring new Voyager trains. Reliability of the Voyager certain minimum income undertakings from joint ventures and and Super Voyager train fleets is far superior to the average movements in foreign exchange rates applied in translating high-speed train rolling stock and, despite a 40% year on year overseas profits to sterling. increase in passenger numbers, overcrowding has been significantly reduced. Road King is benefiting from China’s positive economic outlook and the continuing improvement in living standards, both of The impact of the new investment and service improvements which have resulted in a surge in car ownership. Total traffic and across the company was recognised earlier this year when Virgin toll revenue on Road King’s highway projects in the year ended Trains won first prize for its Voyager and Pendolino trains in the 31 December 2002 increased by 9.7% and 14% respectively Rail Network category of the prestigious national Business Travel compared to 2001. World Awards 2003. Among the areas highlighted were train Work on Anhui Bengbu Chaoyanglu Bridge, Road King’s only safety improvements, such as high visibility exterior doors and outstanding construction project, was completed in December safety instructions in Braille. 2002 and toll collection has commenced. In line with the business development strategy, Road King has signed an agreement to dispose of its interest in Shanxi Provincial Highway INVESTMENTS Huanggu Route Xiaodian Fenhe Bridge project to its People’s thetrainline.com Republic of China (‘‘PRC’’) partner. thetrainline.com is firmly established as the largest UK rail Road King expects to secure additional cash revenue and profit internet and call centre booking service. A joint venture between from its investment in and operation of the Baoding-Tianjin the Stagecoach and Virgin Groups, it helps rail travellers plan Expressway project in Hebei Province. The Hebei Provincial their journeys and buy train tickets to anywhere in the UK. Government has agreed the investment and, subject to the fulfilment of conditions, Road King will sign an unconditional Now with over 7 million registered users, thetrainline.com has contract. scope for considerable growth going forward. thetrainline.com is part of Stagecoach’s commitment to devising transport solutions Performance of highway projects in the early months of 2003 and continues to benefit from technical support by Cap Gemini continued to be encouraging with double-digit revenue and Ernst and Young, which has made significant investment to traffic volume growth. Road King has not experienced any support the business. Stagecoach’s share of the business is 49%. notable adverse effects from the spread of SARS in the region.

14 Operating review 2003

CORPORATE SOCIAL RESPONSIBILITY In our UK Bus division, we are working hard to improve skills and raise standards of customer service through the roll-out of a Stagecoach Group is committed to taking our wider corporate programme of vocational qualifications in our bus companies. responsibilities seriously and building positive relationships with More than 2,100 Stagecoach drivers now have an S/NVQ, with a our stakeholders. This contribution to the wider community has further 1,000 in the process of achieving this qualification. been part of the company’s ethos since it was formed more than Both our UK Bus and South West Trains businesses are working two decades ago. We have a consistent track-record in together to develop the managers of the future through our supporting and working with customers, investors, employees, UK Graduate Recruitment Programme. The two year suppliers and local communities. As a public transport operator, management training programme combines practical experience we have a key role to play in delivering essential services to our with off the job training courses. Within UK Bus, we also have a customers and helping to deliver social inclusion within our staff development programme for internal management training. communities. Stagecoach is working with government-funded enterprise Our commitment to responsible business practice means we agencies in the UK to get the long-term unemployed back into continually strive to improve our impact on society and the work through successful projects in Glasgow and Dumfries and environment through our mainstream business practices. This is Galloway in Scotland. Our Engineering Apprenticeship Programme not just about our operations, products and services. We seek to promotes careers in local schools and we are now looking combine building our business, through efficiency and forward to our second intake following a successful first year. competitiveness, with building the people who work for our We also want to help build a healthy workforce that feels proud business and building trust with the broader community. to work for our business. At South West Trains, for example, the in-house occupational health organisation has held a number of Stagecoach’s commitment to being a socially responsible health fairs and our employee well-being initiative offered business has been recognised by a number of external influenza injections to all staff. interested parties. We are a constituent of the FTSE4Good index, which aims to set a global standard for socially- Access for all responsible investment. In the UK, we were among the first Stagecoach continues to work hard to meet the needs of all our companies ^ and the only major public transport operator ^ to customers. We are very aware of the special needs of particular take part in Business in the Community’s first Corporate people that rely on our services and a number of our businesses Responsibility Index. have received special commendations for their work.

Stagecoach was one of the first operators to start a programme Our people of significant investment in low-floor accessible vehicles and our Respect and value for our people lies at the core of Stagecoach progress towards making all Stagecoach bus services in the Group and its businesses around the globe. The people who UK low-floor is well on track. We recognise these vehicles, which deliver our frontline services ^ from drivers to engineers and have dedicated wheelchair ramps and some of which have special support staff ^ are the backbone of our operation and we want ‘‘kneeling’’ mechanisms, are extremely important to our elderly all our people to share in the success of the business. customers, people with disabilities or families with young children.

We are an equal opportunities employer and consistently aim to The interiors of our new low-floor buses in the UK were specially work in partnership with trade unions to improve the pay and designed with input from individuals representing various conditions of our people. disability groups. The vehicles have helpful features such as special Our commitment to our people starts with the recruitment walkway surfacing, brightly coloured grab handles, clearly defined process and flows through in our approach to their induction to seating areas and space for wheelchairs. Our new Desiro fleet at the company and on-going training and development. South West Trains will also offer significant accessibility benefit.

15 ‘‘I’ve been driving for 30 years and make sure that the children get to school safely and return home safely.’’ Cleveland Brady School bus driver UK Bus

Operating review 2003

We also liaise with local authorities and disability support groups Our security programme involves on-bus measures, infrastructure to get the benefit of the latest training advice. A pilot scheme issues, staff training and support as well as working in the for assisting deaf people using public transport is underway in community. The CCTV management unit in Manchester, for South Tyneside and is being rolled out throughout our bus example, continues the tactical deployment of resources to deter company in North East England. At South West Trains, we have vandalism and crime in the city and high-quality video evidence appointed a Disability Services Manager to ensure we follow best has helped secure a number of convictions in the courts. In practice in the design of station improvements and train London, three of our buses have been converted into mobile refurbishments. We have also issued all our frontline staff with a police stations for use by the Metropolitan Police in problem booklet that gives thorough guidance on how best to meet the areas. Extra police and dedicated traffic wardens in London are needs of disabled travellers. In Hong Kong, the Citybus business also helping address the most crime- and congestion-hit bus last year completed a Braille bus guide. routes.

Across our businesses, we work in close partnership with the Safety police and schools as part of citizenship programmes to tackle Safety and security is our top priority ^ both for our passengers the root problems of anti-social behaviour and encourage and our people. A proactive culture of safety runs through all our transport safety. businesses and we firmly believe good safety is part of good commercial practice. Safety remains a key management priority at our rail businesses. Buses, coaches and trains are the safest forms of transport ^ far Health and safety planning and monitoring as well as staff safer than cars. We have a clear and simple policy ^ no service training are firmly embedded in the culture of the organisations. runs unless we are 100% convinced it is safe. We are committed We have reaffirmed our commitment to retain guards on all our to ensuring the highest standards of safety for our passengers passenger trains ^ which some other operators have withdrawn ^ and improving health and safety standards for our employees. because we believe railway safety should also extend to the This area is monitored and reported on across all our companies security of passengers. and immediate action is taken to address issues in our business South West Trains has continued to invest in improving the processes. safety of our rolling stock. The fitting of the Train Protection Safety is part of a well-defined risk management process across Warning System to all our trains is nearly complete, well ahead our business. A main board executive director, Graham Eccles, of the statutory deadline. Our South West Trains business also has executive responsibility for safety issues across the Group has more Secure Station awards than any other train operating and safety matters are considered at management meetings of company. Virgin Rail Group, our joint venture, is involved in each of our businesses. similar initiatives and its Annual Safety Plan is recognised within the UK rail industry as an example of best practice. The Group has established a Health, Safety and Environmental Committee chaired by one of the non-executive directors Janet Our New Zealand bus and ferry operations have robust procedures Morgan, and also comprising Graham Eccles. It has access to in place, involving formal employee participation, to ensure the internal safety executives and external consultants such as health and safety of our staff and customers. The Accident Arthur D Little, and reports regularly to the Board on safety Compensation Corporation, which is the country’s statutory matters. provider of accident insurance for employers, has audited our procedures and safety record and placed our operations in the top In the UK, Stagecoach and the bus industry as a whole is working 1% of New Zealand companies. Coach USA has a comprehensive with the Government to address issues around bus safety and safety programme in operation in all of its locations and continues security on a regular basis. Crime on buses is low, but we are very to monitor its effectiveness on a regular basis. aware that even the fear of crime affects the working environment for our people and can act as a deterrent in terms of people Stagecoach Group has a good safety record, but we are never choosing to travel by bus or any other form of public transport. complacent and we constantly keep our safety arrangements

16 ‘‘Everybody likes a clean environment ^ it has a huge impact on customers’ perceptions of public transport. Our cleaners take a real pride in their job and none of our buses leave the depot unless I’m sure they will give a first-class, clean travelling environment.’’ Siu Chong Cleaning Inspector Citybus

Operating review 2003

under review. We are working with external consultants to build their personal skills and confidence. They also get the review our current safety governance arrangements and we are chance to learn how some of the country’s top entrepreneurs committed to putting in place any improvements required. have developed their business acumen and achieved success.

In New Zealand, we are helping children from all over the Community country who require specialist care through our three-year Stagecoach services play a vital role in connecting communities sponsorship of the Starship Children’s Hospital in Auckland. around the globe in both urban and rural areas, ensuring social Stagecoach’s funding will initially provide extra specialist inclusion through convenient and affordable public transport. equipment for the hospital’s intensive care unit. However, we see our role as a socially responsible company as far Community arts projects are also flourishing, whether it’s more than a service provider and major employer. As well as through free travel to visit galleries or significant sponsorship modernising public transport systems across the country, we share funding for organisations. In Wellington, we are helping fund the our success with the local communities we serve. During the year, refurbishment of the Embassy Theatre, a landmark community- »0.7m was donated to a wide range of local, national and owned art deco style theatre. international charities, helping them to continue their vital work. Our involvement with good causes goes beyond areas where we Stagecoach was at the heart of a major TV fund-raising drive last have our operations. One of our buses, for example, is now summer to help some of the UK’s lesser-known charities. The stationed permanently in Romania where it has been fitted out company kick-started the annual GMTV Get Up and Give appeal as a mobile dental unit through our work with the charity with a »25,000 donation and provided an open-top bus to help CX999 Aid. We have also helped support the provision of the fund-raising effort around the country in aid of charities medical care to people in Africa and supplied badly needed helping children, disabled and disadvantaged people. computer equipment. We have continued to support a number of children’s and cancer charities throughout the year, as well as matching the fundraising Environment efforts of our staff in national UK campaigns such as the BBC Stagecoach is committed to playing its part in building a Children in Need Appeal. sustainable environment and improving the environmental management of our operations. Education and young people ^ the future of our world ^ are at the heart of much of the support we provide. In our home base Transport has an inevitable impact on our environment and we of Perth, Scotland, for example, we have been working with the are continuing to work hard to develop policies that will local authority and police to fund the supply of high-visibility minimise that impact. We believe that integrated public transport waistcoats for local primary school children to improve their systems will form the central core of future efforts to reduce safety. pollution levels, alleviate road congestion and improve the quality of life in our towns and cities. Community support goes well beyond just money, with hundreds of our people, from managers to frontline staff, devoting many Not only do we work hard to ensure that our day-to-day hours of their own time every day to local projects. Our transport operations interact with the environment in a businesses also provide a huge amount of in-kind support, responsible manner, environmental considerations are also providing vehicles to help community projects with transport. included in all capital investment decisions taken by our business. Some of our staff have also given charities the benefit of their In the UK, we have invested millions of pounds ^ »120 million expertise during secondments, such as helping disability agencies over the last three years alone ^ in new state-of-the art bus improve the use of their transport fleet. fleets with improved energy consumption and reduced emissions. Stagecoach is helping create the entrepreneurs of tomorrow All new Stagecoach vehicles meet tough Euro III emissions through its long-standing support for the UK educational charity standards and in the UK all our buses have changed to use low ‘‘businessdynamics’’. Youngsters take part in courses designed to sulphur fuel.

17 Operating review 2003

Continuously Regenerating Particulate Traps, which are a proven Despite the huge progress and investment we have made in the method of reducing particulate emissions by up to 90%, have area of environmental sustainability, we realise that this is only a been fitted to 50 of our vehicles in Manchester as part of a start and we have a long way to go. Stagecoach Group has been partnership with Greater Manchester Passenger Transport working with external consultants to review our environmental Executive. arrangements and work is continuing to raise awareness of these issues across our management team. A series of key performance Stagecoach is also working with major banks, local authorities, indicators are being put in place to measure our performance hospitals and education providers to develop green travel plans year on year. This will cover areas such as reducing emissions, that reduce the dependence on the car to get to work. Our water and energy consumption, minimising waste and identifying partnership with pharmaceutical giant Pfizer delivers one of the opportunities for recycling. most comprehensive travel plans in the UK and has helped cut car commuting among its staff at its European research HQ in We are currently updating our Environmental Policy, first issued Sandwich, Kent, by 9%. In Cambridge, a partnership with the in 2000, and a fuller separate report will be published later in local authorities and Addenbrookes Hospital has seen an on-site 2003. bus station replace 100 car parking spaces, with Stagecoach offering discounted tickets to hospital staff.

South West Trains’ »1 billion order for new Desiro coaches will mean faster trains providing an incentive for people to cut the number of journeys they make by car. The high-tech trains will also create less noise pollution than the existing slam door units.

Overseas, Stagecoach businesses are conducting trials of new vehicles designed to cut the impact of operations on the local environment.

In New Zealand, a prototype trolley bus ^ featuring a stylish new body with electrical components and axles recycled from an older vehicle ^ is on trial in Wellington and it is hoped this will be the first of 60 rebuilt trolley buses for the area. Three ultra- low emission hybrid-electric buses have also been purchased for trial operation in Auckland. We are also planning to bring one of these new low emission dual power electric-diesel buses from New Zealand for extensive demonstration trials in the UK.

Across its global operations, Stagecoach continues to provide support and training to its employees to ensure compliance with legislation, as well as effective waste management, and improved energy consumption and environmental performance.

18 The financial results for the year ended 30 April 2003 reflect the strong underlying cash flow generation of the Group and the continued trading profitability of our four key operating divisions.

Martin Griffiths Finance Director

Finance Director’s review 2003

Overall The segmentation of operating profit by division has been The financial results for the year ended 30 April 2003 reflect the restated, as previously reported in our interim report for the strong underlying cash flow generation of the Group and the 6 months ended 31 October 2002. Certain costs that were continued trading profitability of our four key operating divisions. previously classified within ‘‘Group overheads’’ have been applied to particular divisions. Total profits are unchanged but we believe Turnover for the year was »2,076.6m (2002 ^ »2,111.4m). Total the new presentation provides a better reflection of divisional operating profit before goodwill amortisation and exceptional profitability and reflects the way that management now items was »146.4m (2002 ^ »166.6m). Adjusted earnings per monitors financial performance. share (before goodwill amortisation and exceptional items) increased from 6.3 pence to 6.4 pence. Joint ventures and associates Our share of joint ventures’ and associates’ operating profits Trading results (before goodwill amortisation and exceptional items) was The decrease in operating profit largely reflects the difficult »12.6m compared to »18.5m in the prior year. The reduction conditions at Coach USA, and the subsequent refocusing of that reflects reduced profitability at Virgin Rail Group and Road King, business. The sluggish Hong Kong economic environment coupled as discussed in the Operating Review. In addition to Virgin Rail with the outbreak of SARS also contributed to the decrease in Group (profit »7.2m; 2002 ^ »10.8m), the results include our operating profits. Total Group operating loss, after taking account share of thetrainline.com’s operating losses which was »4.3m of exceptional items and goodwill, was »466.2m (2002 ^ profit (2002 ^ »4.4m), our share of profits in Road King of »10.5m of »96.5m). (2002 ^ »12.9m) and our share of operating losses of »0.8m (2002 ^ »0.8m) from our other joint ventures and associates. The turnover and operating loss is further analysed as follows:

Turnover Operating Restructuring costs profit/(loss) Restructuring costs of »6.3m (2002 ^ »6.6m) have been charged 2003 2002 2003 2002 against operating profits, of which »3.0m relates to the »m »m »m »m restructuring at Coach USA, »1.8m relates to UK Bus and »1.5m relates to redundancy costs incurred in our other divisions. UK Bus 598.4 567.9 67.0 62.7 Overseas Bus 183.7 194.7 30.3 33.4 Depreciation and amortisation Coach USA 603.0 682.3 14.0 38.4 Total depreciation decreased from »112.7m to »105.3m, Rail 413.6 402.8 38.2 31.0 reflecting the impairment of Coach USA’s tangible fixed assets Virgin Rail Group 276.1 261.2 7.2 10.8 recorded as at 31 October 2002, the effect of foreign exchange thetrainline.com 11.0 11.7 (4.3) (4.4) movements on the translation of US$ and HK$ charges and a Virgin Rail Group/ trainline eliminations (9.2) (9.2) ^ ^ reduction in capital expenditure. The annual goodwill Group overheads ^ ^ (9.4) (10.8) amortisation charge was »37.6m compared to »50.5m in 2002, Restructuring costs ^ ^ (6.3) (6.6) reflecting the fact that we have recorded a goodwill impairment Road King ^ ^ 10.5 12.9 loss of »386.8m in the year. Other joint ventures and associates ^ ^ (0.8) (0.8) Exceptional items Total before goodwill Net exceptional charges before tax of »575.5m (2002 ^ »14.3m) amortisation and were reported. These include charges of »575.0m associated with exceptional items 2,076.6 2,111.4 146.4 166.6 the impairment review of Coach USA which comprised an Goodwill amortisation ^ ^ (37.6) (50.5) impairment of goodwill totalling »386.8m, an impairment of Coach USA tangible fixed assets of »162.7m, a write-down of current assets exceptional items ^ ^ (575.0) (19.6) to net realisable value totaling »17.8m and a provision for loss on operations to be closed or sold of »7.7m. The results also 2,076.6 2,111.4 (466.2) 96.5 include a net loss on the sale of properties of »0.5m.

19 Finance Director’s review 2003

Finance charges borrowing position and surplus cash balances are used to repay Net interest and financing charges decreased from »59.8m to debt where possible. »33.5m as a result of the favourable interest rate environment and gains of »15.1m on the repurchase of bonds. EBITDA before Capital Expenditure exceptional items to interest cover was 7.5 times compared to Additions to tangible fixed assets during the year were as follows: 4.7 times in 2002. This is based on EBITDA before exceptional items of »251.7m (2002 ^ »279.3m). 2003 2002 »m »m Acquisitions and disposals We have not completed any significant acquisitions or disposals UK Bus 34.4 50.5 in the 12 months ended 30 April 2003. Details of disposals since Coach USA 21.5 40.1 30 April 2003 are given in the Directors’ report on pages 24 and 25. Overseas Bus 13.3 9.2 Rail 1.9 3.5 Taxation Before taking account of the exceptional write-offs in Coach USA Total 71.1 103.3 of »575.0m, profit before tax for the year was »74.8m. The tax charge of »25.0m represents an effective rate of 33.4% on this In addition, new operating leases were entered into during the profit (2002 ^ 35.7%). year by the UK Bus division for vehicles with a capital value of The decrease in the effective tax rate this year is principally due »19.6m. to changes in the mix of profits from the various parts of the business. Treasury risk management The main areas of financial risk associated with our businesses Earnings and dividends are managed by our centralised Group Treasury function. The Earnings per share before goodwill amortisation and exceptional Board regularly reviews these risks and approves the Group’s items were 6.4 pence, compared to 6.3 pence in 2002. Basic loss treasury policy, which covers the management of these risks. per share (taking account of all exceptional items and goodwill Financial instruments are held to finance Group operations and amortisation) was 40.0 pence, compared to last year’s earnings to manage the financial risks associated with these operations. of 2.1 pence. The weighted average number of shares in issue Derivative financial instruments are used to manage financial risk during the year was 1,314.4m (2002 ^ 1,309.9m). No shares exposures and to achieve greater certainty of future costs. The were repurchased during the year to 30 April 2003. Shares in use of financial instruments is restricted to financial risk and issue at the year-end were 1,320.9m. treasury management only. No speculative trading is undertaken The Group has authority to repurchase a further 132m shares. and activities during the year were in compliance with the Board This authority expires at the 2003 AGM and we will seek to approved treasury policy. renew the general authority to repurchase up to 10% of the issued share capital. Liquidity and funding Our policy is to finance the Group through a mixture of bank The total proposed dividend for the year is 2.6 pence per share and hire purchase debt, capital markets issues and retained (2002 ^ 2.6 pence). This represents dividend cover (before earnings. Financing is generally raised centrally and on-lent to goodwill amortisation and exceptional items) of 2.5 times operating subsidiaries on commercial terms. As at 30 April 2003, compared to 2.4 times in 2002. the Group’s committed credit facilities were »647.1m, »335.6m Cash flows of which were utilised, including bank guarantees, bonding and Cash generation across the Group remained strong with free cash letters of credit. flows amounting to »217.8m. This compares to »184.3m last The Group’s policy is to look at a variety of funding sources to year. Free cash flow per share increased from 14.1 pence to minimise interest cost and to maintain access to funding. Group 16.6 pence. borrowings (after taking account of swaps and forward contracts) At 30 April 2003, net cash balances were »164.7m, an increase are denominated in the operational currencies of the Group. The of »14.7m from 30 April 2002. The Group remains in a net maturity of borrowings as at 30 April 2003 is shown in note 17.

20 Interest rate risk management location. The Group considers the risk of material loss in the event To provide some certainty as to the level of interest cost, it is of non-performance by a financial counterparty to be unlikely. our policy to manage interest rate exposure through the use of fixed and floating rate debt. Derivative instruments are also Balance sheet used where appropriate to generate the desired interest rate Net assets have decreased by 65.1% from »909.1m to »317.1m profile. At 30 April 2003, 41% (30 April 2002 ^ 49%) of the principally due to the exceptional write-offs of »575.0m at Coach Group’s gross borrowings were covered by fixed and capped/ USA. Net debt at 30 April 2003 decreased by 27.7% to »560.0m floored interest rates. compared to »774.6m as at 30 April 2002. Based on net assets of »317.1m and net debt of »560.0m, book gearing is 176.6% Currency rate risk in comparison to last year’s level of 85.2%. After taking account The Group is exposed to limited transactional currency risk due of proceeds in relation to disposals announced post year-end, to the small number of foreign currency transactions entered into pro-forma net debt would reduce to »268.4m. The disposals have by subsidiaries in currencies other than their functional currency. a minimal impact on net assets, and therefore would result in Where necessary, forward buying of currencies is carried out by pro-forma gearing of 84.6%. the Group Treasury function. Pensions The Group has overseas investments in Canada, the USA, New The Group continues to acoount for pensions on the basis of SSAP Zealand and, until June 2003, Hong Kong. As the impact of US$ 24, ‘‘Accounting for pension costs’’. Under SSAP 24, total pension and HK$ exchange rate movements on operating profits is offset costs in the year ended 30 April 2003 were »31.2m (2002 ^ by foreign currency denominated interest and fuel costs, the »18.0m). The increase in costs principally relates to the rail division. Group does not seek to hedge the impact of exchange rate The Group provides in note 26, the transitional disclosures movements on reported profits. To minimise balance sheet required under FRS 17, ‘‘Retirement Benefits’’. Under FRS 17, translation exposure, the Group aims to hedge overseas the defined benefit pension schemes in respect of the Group’s acquisitions and operations through borrowings denominated UK Bus and head office employees showed a net liability at in their functional currency or through the use of derivative 30 April 2003 of »156.2m after taking account of deferred tax. financial instruments which convert sterling borrowings into In addition, the defined benefit pension schemes in respect of borrowings of the functional currency, and through forward the Group’s UK Rail employees showed a net liability of »24.3m, currency exchange contracts. It is Group policy to examine each after deferred tax. We believe that the Rail deficit needs to overseas investment individually and adopt a strategy based on be considered separately as the franchise payments under the current and forecast political and economic climates. This policy new South West Trains franchise take account of increased aims to allow the Group to maintain a low cost of funds and to contribution levels to fund the deficit and we understand that retain some potential for currency appreciation whilst partially the Group has no liability beyond the end of the franchise. hedging against currency depreciation. The defined benefit pension schemes are already benefiting from Commodity price risk increased contributions from the Group and from the employees. The Group is exposed to commodity price risk through its fuel In the year ended 30 April 2003, the cash contributions from the usage. It is Group policy to establish fixed price levels to hedge Group to the various pension schemes increased by »7.4m, of this exposure for up to four years and, where necessary, to enter which »5.5m relates to the rail division. We have already planned into physical contracts or derivative agreements to achieve for increased cash contributions for the year ending 30 April certainty in the short term as to fuel costs and to reduce the 2004. We remain committed to retaining defined benefit pension year on year fluctuations over the medium term. At 30 April arrangements in the UK and continue to have constructive 2003, we had fixed approximately 100% of the Group’s discussions regarding future contribution rates and other aspects estimated fuel usage to 30 April 2004 when taking account of the defined benefit pension schemes. of the disposals announced in May and June.

Credit risk It is our policy to invest cash assets safely and profitably. To MARTIN A GRIFFITHS control credit risk, counterparty credit limits are set by reference Finance Director to published credit ratings and the counterparty’s geographical 25 June 2003

21 Board of directors 2003

1 Robert Speirs, Non-Executive Chairman 5 Ewan Brown CBE, Non-Executive Director A non-executive director of the Group since March 1995. In Ewan Brown has been a non-executive director of the Group July 2002, he was appointed by the Board as Non-Executive since 1988. He is an executive director of Noble Grossart Ltd and Chairman. A former Group Finance Director of The Royal Bank of Chairman of Lloyds TSB Scotland plc. His other non-executive Scotland plc, Robert Speirs is also Chairman of the Miller Group directorships include John Wood Group plc, Transport Initiatives Ltd and Bell Group plc. His other non-executive directorships Edinburgh Limited and Lloyds TSB Group plc. Aged 61. include Canary Wharf Group plc and Martin Currie Income and Growth Trust. Aged 66. 6 Iain Duffin, Non-Executive Director Iain Duffin became a non-executive director of the Group 2 Brian Souter, Chief Executive in September 2001. He was appointed Chairman of the A co-founder of Stagecoach, Brian Souter has extensive Remuneration Committee on 1 May 2003. He is non-executive knowledge of the ground transportation industry around the Chairman of Origo Services. He has previously held executive world. Brian was Chairman of the Group throughout the year positions in the UK and the US with a number of organisations ended 30 April 2002. Following Keith Cochrane’s resignation, including Macfarlane Group plc, Hughes MicroElectronics, ITT the Board appointed him Chief Executive on 21 July 2002. Canon and LucasVarity. Aged 56. He is now responsible for managing all of the Group’s operations. He is also a board member of Road King 7 Ann Gloag, Non-Executive Director Infrastructure. Brian Souter is also Chairman of ScotAirways Ann Gloag co-founded Stagecoach in 1980 and served as an Group Ltd and was a director of Scottish Enterprise until executive director until May 2000. She is a past winner of the November 2002. He is a Chartered Accountant. Aged 49. Businesswoman of the Year Award and European Women in Achievement Award. She is a trustee of the Princess Royal Trust 3 Martin Griffiths, Finance Director for Carers and an international Board member of Mercy Ships. Appointed Finance Director in April 2000, Martin Griffiths is Aged 60. responsible for the Group’s overall financial policy and treasury management. He also has responsibility for the overall 8 Dr Janet Morgan, Non-Executive Director management of the Group’s property portfolio. He is a Chartered Dr Janet Morgan, Lady Balfour of Burleigh, became a non- Accountant. Aged 37. executive director in April 2001. She is Chairman of the Health, Safety & Environment Committee. She is also a non-executive 4 Graham Eccles, Executive Director ^ Rail director of Cable & Wireless plc, BPB plc, NMT Group plc and Graham Eccles has over 35 years’ experience in the rail industry other companies. Dr Morgan is a Fellow of the Royal Society of and has held a number of senior management posts. He has Edinburgh, a Trustee of the Carnegie Trust for the Universities of been a member of the Board since September 2000 and prior Scotland and Chairman of the Scottish Cultural Resources Access to that was managing director of South West Trains from 1999. Network. She was a member of the Central Policy Review Staff He is responsible for the management of all the Group’s rail of the Cabinet Office. Aged 57. operations and business development opportunities in the rail market. He also has main board responsibility for Group safety 9 Russell Walls, Non-Executive Director matters. Graham Eccles is a director of Virgin Rail Group Appointed as a non-executive director in June 2000, Russell Walls Holdings. Aged 56. is the current Chairman of the Audit Committee. Following Robert Speirs appointment as Chairman in July 2002, Russell Walls was appointed the senior independent non-executive director. He is a non-executive director of Signet Group plc. He was previously Group Finance Director of BAA plc and Wellcome Key to photograph PLC. For many years he worked abroad with Coats Viyella plc where he was Group Finance Director from January 1990. He is 483219567 a fellow of the Association of Chartered Certified Accountants. Aged 59.

22 Directors’ report 2003

Principal activity and business review development and promotion opportunities for all employees The Group’s principal activity is the provision of public transport regardless of physical disability, gender, religion or belief and services in the UK and overseas. racial or ethnic origin. The Group gives full consideration to applications for employment from disabled persons where the A review of the Group’s business performance, developments requirements of the job can be adequately fulfilled by a during the year, its position at the year end and likely future handicapped or disabled person. Where existing employees prospects, is set out in the Chairman’s statement on pages 4 become disabled, it is the Group’s policy wherever practicable to and 5, the Chief Executive’s statement on pages 6 and 7, the provide continuing employment under normal terms and Operating review on pages 8 to18, and in the Finance Director’s conditions and to provide training and career development and review on pages 19 to 21. promotion to disabled employees wherever appropriate.

Group results and dividends The Group is committed to employee participation and uses a The results for the year are set out in the consolidated profit and variety of methods to inform, consult and involve its employees. loss account on page 36. Employees participate directly in the success of the business through the Group’s bonus and other remuneration schemes and An interim dividend of 0.8 pence per ordinary share (net) was are encouraged to invest through participation in share option paid on 12 March 2003. The directors recommend a final schemes. Since flotation in 1993, there have been three dividend of 1.8 pence per ordinary share making a total dividend invitations to UK employees to subscribe to the Group’s of 2.6 pence per share for the year. Subject to approval by sharesave (‘‘SAYE’’) schemes, all of which have met with shareholders, the final dividend will be paid on 8 October 2003 encouraging levels of response. to those ordinary shareholders on the register at 5 September 2003. The Group periodically arranges meetings that bring together representatives from senior management and trade unions. Directors and their interests Discussions take place regularly with the trade unions The names, responsibilities and biographical details of the representing the vast majority of the Group’s employees on a directors appear on page 22. wide range of issues. The Group also produces a range of internal newsletters and information circulars which keep employees Following Keith Cochrane’s resignation as Group Chief Executive abreast of developments. Employees are encouraged to discuss on 21 July 2002, the Board subsequently appointed Brian Souter matters of interest to them and subjects affecting day to day as Group Chief Executive, and Robert Speirs as Non-Executive operations of the Group with management. Chairman.

Brian Cox retired as a director on 3 July 2002. Directors’ responsibilities Company law requires the directors to prepare accounts for each Ann Gloag, Martin Griffiths and Russell Walls retire by rotation financial year which give a true and fair view of the state of at the 2003 Annual General Meeting in accordance with the affairs of the Company and of the Group, and of the profit or Articles of Association and being eligible offer themselves for loss of the Group for that period. In preparing those accounts, re-election. the directors are required to:

Table A set out on page 24 gives the interests of the directors * select suitable accounting policies and then apply them and their families in the share capital of the Company. consistently;

* make judgments and estimates that are reasonable and Substantial shareholdings prudent; On 24 June (being the latest practical date prior to the date of this report), the only disclosable shareholdings in excess of 3% * state whether applicable accounting standards have been (other than certain directors’ shareholdings) were as follows: followed, subject to any material departures disclosed and explained in the accounts; and Barclays 11.16% Marathon Asset Management 6.06% * prepare the accounts on a going concern basis unless it is Legal & General Assurance Society Ltd 3.42% inappropriate to presume that the Group will continue in business. Employment policies The Group strives to meet its business objectives by motivating The directors are responsible for keeping proper accounting and encouraging its employees to be responsive to the needs of records which disclose with reasonable accuracy at any time the its customers and to maintain and, where possible, improve financial position of the Company and of the Group, and enable operational performance. The Group is also committed to them to ensure that the accounts comply with the Companies providing equality of opportunity to current employees and Act 1985. The directors are also responsible for safeguarding the potential employees. This applies to appropriate training, career assets of the Company and of the Group, and hence for taking

23 Directors’ report 2003

reasonable steps for the prevention and detection of fraud and It is the Group’s policy not to make political contributions and, other irregularities. accordingly, there were no payments for political purposes during the year (2002 ^ »Nil). Auditors Following the conversion of our auditors, Authority for company to purchase its own shares PricewaterhouseCoopers, to a Limited Liability Partnership (LLP) At the 2002 Annual General Meeting, the Company was granted from 1 January 2003, PricewaterhouseCoopers resigned as authority by its shareholders under section 166 of the Companies auditors and the directors appointed their successor, Act 1985 to repurchase up to 10% of its ordinary shares of PricewaterhouseCoopers LLP. A resolution to re-appoint 0.5 pence each. During the year, no shares were repurchased. PricewaterhouseCoopers LLP as auditors to the Company, at Under the existing authority, the Company may repurchase up to remuneration to be fixed by the directors, will be proposed at a further 132,094,601 shares. This authority will expire on 5 March the next Annual General Meeting. 2004 unless revoked, varied or renewed prior to this date. Supplier payment policy and practice A resolution will be placed at the next Annual General Meeting It is the Group’s policy to agree appropriate terms of payment that the Company be authorised to repurchase up to 10% of its with suppliers for each transaction or series of transactions, and ordinary shares of 0.5 pence each, which, if passed, will lapse on to abide by those terms based on the timely submission of or before 28 February 2005. satisfactory invoices. The policies followed by each of the major UK operating subsidiaries are disclosed in the accounts of those Post balance sheet events companies. As the Company is a holding Company, trade creditor (i) Disposal of Citybus days is not a relevant figure. For the Group as a whole, the trade On 9 June 2003, the Group announced the disposal of Citybus to creditors outstanding at the year-end represented 34 days’ Delta Pearl Limited, a 100% indirect subsidiary of Chow Tai Fook purchases (2002 ^ 32 days). Enterprises Limited, the privately owned company of the Cheng Yu Tung family and the major shareholder in New World Fixed assets Development Company Limited which in turn has an interest in In the opinion of the directors, there is no material deficit in the New World First Bus Services Limited, one of Hong Kong’s major open market value of the Group’s interest in land and buildings bus operators. The sale was completed on 23 June 2003. relative to book value. The gross consideration for the disposal is HK$2,200m. The net Close company status cash amount received was HK$1,646m, which represented the The directors are advised that at 30 April 2003 the Company gross consideration less the amount of net third party debt as at was not a close company within the meaning of the Income and 30 April 2003, being HK$554m. The purchaser assumed all of the Corporation Taxes Act 1988. net third party debt of Citybus.

Charitable and political contributions The purchaser also assumed capital commitments of Group companies made charitable donations of »0.7m (2002 ^ approximately HK$239m relating mainly to the completion of a »0.5m) during the year. new depot for Citybus at Chaiwan in Hong Kong.

Number of shares Number of shares

30 April and 30 April and 30 April and 30 April and Table A 25 June 2003 22 July 2002 25 June 2003 22 July 2002

Ordinary shares of 0.5p each Share options held by Directors Brian Souter beneficial 177,477,868 167,306,920 Brian Souter 2,930,371 Nil non-beneficial 17,059,829 15,450,145 Graham Eccles 1,832,657 648,953 Graham Eccles 37,258 16,622 Martin Griffiths 7,997 7,740 Martin Griffiths 1,922,849 776,182 Ewan Brown Nil Nil Ewan Brown Nil Nil Ann Gloag beneficial 147,071,155 143,751,787 Ann Gloag Nil 12,022 non-beneficial 2,804,564 2,804,564 Janet Morgan Nil Nil Janet Morgan Nil Nil Robert Speirs Nil Nil Robert Speirs 18,500 18,500 Russell Walls 20,000 6,000 Russell Walls Nil Nil Iain Duffin 40,000 Nil Iain Duffin Nil Nil

Full details of options held as at 30 April 2003 are contained in the Remuneration Report on pages 30 to 34. No director had a material interest in the loan stock or in the share capital of any subsidiary company.

24 Directors’ report 2003

Further details on the disposal were given in the Group’s Going Concern announcement on 9 June 2003. On the basis of current financial projections and the facilities available, the directors are satisfied that the Group has adequate (ii) Disposal of businesses at Coach USA resources to continue for the foreseeable future and, accordingly, Since 30 April 2003, the Group has announced the disposals of a consider it appropriate to adopt the going concern basis in number of parts of Coach USA in line with the restructuring plan preparing the accounts. for Coach USA announced in December 2002. The disposals announced were as follows: By order of the Board * On 6 June 2003, the Group announced that it had agreed terms for the sale of the South Central and West Regions of Coach USA to a newly formed affiliate of Kohlberg & Co., LLC. Completion of the transaction is subject to regulatory DEREK SCOTT approval, final confirmation of financing and normal closing Company Secretary conditions. The gross consideration for the sale is US$155m, 25 June 2003 to be satisfied by cash of US$128.5m and an interest-bearing loan note receivable of US$26.5m repayable no later than 63 months from date of close.

* On 2 June 2003, the Group announced that it had completed the sale to Peter Pan Bus Lines of the business and assets of the New England Region of Coach USA. The business has been sold for a consideration of US$40m, satisfied by cash of US$33m and loan notes receivable of US$5m and US$2m repayable after three years and four years respectively, both interest bearing.

* On 22 May 2003, the Group announced that it had agreed terms for the sale to First Transit, a US subsidiary of First Group plc, of the business and assets of the Transit Division of Coach USA. The transaction is subject to normal commercial closing conditions, including approval from affected public authorities, with completion anticipated before 30 June 2003. The consideration for the transaction is US$22.5m, satisfied by cash.

These transactions will not result in a material gain or loss on disposal in the consolidated accounts of Stagecoach Group plc. Further details on the disposals were given in the Group’s announcements of each disposal.

25 Corporate governance 2003

The Group is committed to high standards of corporate appointment and subsequently such training or briefings as are governance. The Stagecoach Board is accountable to shareholders considered necessary to keep abreast of matters affecting their and others for the Group’s activities and is responsible for the duties as directors. The number of full Board meetings during the effectiveness of corporate governance practices within the Group. year was ten. The full Board meets once a year at an operational In accordance with the Listing Rules issued by the Financial location and regular verbal communication is maintained by the Services Authority, this statement describes how the principles of Chairman to ensure all directors are briefed on strategic and good corporate governance that are set out in the Combined operational issues. Code have been applied. Non-attendance at the Board or its committees occurs only in The Board notes both the report of Derek Higgs on the role and very exceptional circumstances. The Board has a number of effectiveness of non-executive directors and the accompanying matters reserved for its consideration, with principal report by Sir Robert Smith on audit committee reform. The responsibilities being to agree the overall strategy and investment Group currently complies with many of the recommendations policy, to approve major capital expenditure, to monitor contained in the two reports and will review its current corporate performance of senior management, to ensure that there are governance practices in light of the recommendations contained proper internal controls in place and to vet acquisitions or within these and the timescales set for compliance. disposals. All directors have full and timely access to information with Board papers distributed in advance of meetings. On 21 July 2002, the Board appointed Robert Speirs, previously the senior independent non-executive director, as non-executive The Board keeps the roles and contribution made by each Chairman. Brian Souter was appointed Group Chief Executive at director under review and changes in responsibilities (for example the same time. in the composition of Board committees during the year) are made where necessary to improve the Board’s effectiveness. To The Board provide a more manageable process and better control, certain of The Stagecoach Board currently comprises the Chairman (who is the Board’s powers have been delegated to committees. a non-executive director), the Group Chief Executive, two other The operational management of the Group is delegated by the executive directors and five other non-executive directors. Five of Board to the Group Chief Executive and executive directors. The the six non-executive directors are considered by the Board to be executive directors maintain day-to-day contact and meet independent. The offices of Chairman and Group Chief Executive regularly face-to-face or in videoconferences with non-board have been separately held since 1998. senior management. There are four principal operating divisions The Chairman ensures that meetings of the Board and (UK Bus; Coach USA; Overseas Bus; Rail) which each comprise a shareholders are properly conducted and is responsible for setting varying number of autonomous business units, each headed by a and moving forward the Board’s agenda. Leadership of the Board chairman or managing director who is responsible for the day to (by the Chairman) is not the same as the leadership required day performance of the business unit. The UK Bus division is (from the Group Chief Executive) to turn the Board’s decisions headed by a managing director, who reports to the Group Chief into actions and galvanise the whole enterprise. The Group Chief Executive and is supported by a small team of senior Executive has day-to-day responsibility for all business of the management and other specialists. The division is divided into a Group and carries out the decisions of the Board. number of principal operating units, each headed by a managing director who reports to the managing director of UK Bus. The The directors’ biographies appear on page 22 of this Annual managing director of UK Bus and the other UK Bus directors Report and illustrate the directors’ range of experience, which meet regularly. Coach USA is presently headed by the Group ensures an effective Board to lead and control the Group. The Chief Executive. Coach USA’s executive management board non-executive directors bring an independent viewpoint and comprises the Group Chief Executive and other senior create an overall balance. Following the appointment of Robert management based in North America. The division comprises Speirs as Chairman, Russell Walls became the senior independent several regions, each headed by a regional vice-president who non-executive director. reports to the Group Chief Executive. The Overseas Bus division is headed by a chairman and until June 2003, comprised two The executive and non-executive directors have a complementary principal business units, each of which was headed by a range of financial, operational and entrepreneurial experience that managing director who is responsible for the performance of the ensures no one director or viewpoint is dominant in the decision- business unit. Following the disposal of Citybus in June 2003, making process. the Overseas Bus division consists only of the New Zealand All directors meet regularly with other senior management and operations. The Group Chief Executive generally attends the staff of the Group, have access to confidential advice from the Board and management meetings of the principal Overseas Bus company secretary and may take independent legal or other operations. A Rail board, comprising one executive director and professional advice at the Group’s expense where it is considered other senior management, oversees the development of the necessary for the proper discharge of their duties as directors. All Group’s rail business. At South West Trains, an executive directors submit themselves for election by shareholders at the director is the chairman and this role is separate from the Annual General Meeting following their appointment and all managing director who is responsible for the performance of the directors are required to stand for re-election by shareholders business unit. They are supported on the South West Trains every three years. Each director receives induction training on board by a member of Group management and three non-

26 Corporate governance 2003

executive directors. Virgin Rail Group is headed by a chief * General consulting ^ For other consulting work, the Group executive and Board meetings are attended by one Stagecoach will select an advisor after taking account of the skills and executive director and one other Stagecoach representative. experience required and the expected cost of the work. The Stagecoach is involved in all key decisions at Virgin Rail Group. Group uses a range of advisors for general consulting, including Road King Board meetings are also attended by at least one the auditors where they are best suited to the work being Group executive, and the Chairman of Overseas Bus. undertaken. The auditors are only permitted to provide general consulting when both the Group and the auditors are satisfied The Group holds periodic meetings with its principal shareholders that there are no circumstances that would lead to a threat to and welcomes all shareholders to its AGM and EGMs. Formal the audit team’s independence or a conflict of interest. notice of the 2003 AGM is enclosed within this annual report.

Audit Committee Remuneration Committee The Audit Committee comprises five non-executive directors and The Remuneration Committee during the year comprised five at the present time, its members are Russell Walls (Chairman), non-executive directors, Robert Speirs (Chairman until 1 May Janet Morgan, Robert Speirs, Ewan Brown and Iain Duffin. Of the 2003), Russell Walls, Iain Duffin (Chairman from 1 May 2003), members of the Audit Committee, the Chairman and one other Janet Morgan and Ann Gloag. Ann Gloag is no longer a member are former Finance Directors of FTSE 100 companies and a third of the Committee. The Remuneration Committee met two times member is currently the chairman of an audit committee of during the year. It is responsible for reviewing the scale and another FTSE 100 company. The Committee therefore has deep structure of the remuneration of the executive directors and the financial expertise and is appropriately qualified to undertake its terms of their service contracts and is also responsible for duties in an effective manner. approving grants of and changes to the company’s performance- related incentive schemes and executive share option schemes. The Audit Committee met twice during the year and has met a Exercise of options, which is always subject to the rules of the further three times in May and June 2003. It receives reports schemes, is approved by a Committee of the main Board. from many of the Group’s business functions including the risk assurance function. It also receives reports from the external Nominations Committee auditors. It considers the scope and results of the audit, the The Nominations Committee currently comprises two non- interim and annual accounts and the accounting and internal executive directors, Robert Speirs and Ewan Brown and one control systems in place throughout the Group. The Audit executive director, Brian Souter. The Committee may also Committee reviews the cost effectiveness, independence and include, by invitation on an ad hoc basis, the other non-executive objectivity of the external auditors. Subject to the annual directors, as necessary. The purpose of the Committee is to appointment of auditors by the shareholders, the Audit propose to the Board any new executive director appointments. Committee conducts a continuous review of the relationship Final appointments are the responsibility of the whole Board. The between the Group and the auditors. This review includes: Committee did not meet during the year because there were no * the consideration of audit fees that should be paid as well as new or proposed appointments to the Board. The changes to the any other fees which are payable to auditors or affiliated firms Chairman and Group Chief Executive roles in July 2002 were in respect of non-audit activities; dealt with by the Board as a whole. * the consideration of the auditors’ independence and objectivity; Health, Safety and Environmental Committee * the nature and scope of the external audit and the The Health, Safety and Environmental Committee is chaired arrangements which have been made to ensure co-ordination by a non-executive director Janet Morgan, and also comprises where more than one audit firm or offices of the same firm Graham Eccles. It was established to discuss health, safety and are involved; and environmental issues across the Group and to report regularly to * discussions on such issues as compliance with accounting the Board on these matters. It has access to internal safety standards. executives and also external consultants. Our procedures in respect of other services provided by the auditors are: Directors’ remuneration * Audit related services ^ These are services that the auditors The Remuneration Committee makes recommendations to the must undertake or are best placed to undertake by virtue of Board for ensuring that the directors’ remuneration is appropriate their role as auditors. Such services include formalities relating to attract, motivate and retain executive directors of the quality to bank financing, regulatory reports, and certain shareholder needed to run the Group’s business successfully. The Committee circulars. The auditors would generally provide all such believes that remuneration packages should contain significant services. performance-related elements. Performance targets are * Tax consulting ^ It is the Group’s policy to select the advisor established to align incentives with the interests of shareholders, for each specific piece of tax consulting work who has the using an appropriate balance of long- and short-term targets. most appropriate skills and experience for the work required. These include not only traditional financial indicators but also The Group uses a range of advisors for tax consulting, personal targets, successful investment, innovation, staff including the auditors where they are best suited to the work development, customer satisfaction, achievement of regulatory being undertaken. requirements, including health and safety and environmental

27 Corporate governance 2003

targets. The constitution and operation of the Remuneration Board considers whether it is appropriate to accept certain risks Committee complies with the principles and provisions of the that cannot be fully controlled or mitigated by the Group. Combined Code and this is detailed in the remuneration report The Group’s risk management process was embedded throughout laid out on pages 30 to 34. the businesses during the year ended 30 April 2003. The Board has carried out a review of the effectiveness of the Group’s Relations with shareholders internal control environment and such reviews are supported on The Board considers communications with shareholders, whether an ongoing basis by the work of the Audit Committee. The Board large or small, external or employee, to be extremely important. is satisfied that the processes are in place to ensure that risks are The Group holds periodic meetings with representatives of major mitigated to an acceptable level. institutional shareholders, other fund managers and representatives of the financial press. Annual meetings are held with employee The Board has designated specific individuals to oversee the shareholder representatives through the ESOP and QUEST trustee internal control and risk management processes, while boards. recognising that it retains ultimate responsibility for these. The Board believes that it is important that these processes remain The programme of investor relations includes presentations in rooted throughout the business and the managing director of London of the full year and interim results and meetings with each operating unit is responsible for the internal control institutional investors in the UK and overseas. Investor and analyst framework within that unit. The Audit Committee meets with feedback is sought after presentations to ensure key strategies, representatives of operating units because this is one way for an market trends and actions being taken are being effectively independent appraisal of risk management to be obtained. communicated and shareholder objectives are known. During the year written responses are given to letters or e-mail received from Self assessment of risk conducted by the directors and senior shareholders and all shareholders receive interim and annual reports management is ongoing and has been considered at several levels or the summary annual report. Each shareholder is given the with each division maintaining a separate risk profile. Risks are opportunity to elect which document they require and this allows evaluated within broad categories: external, reputation, strategic our reporting to be more focused towards the needs of individual and competitive, legal and regulatory, business change, people, shareholders. Information is also available on the company website financial performance and operational performance. (www.stagecoachgroup.com). Private and institutional shareholders The Group Risk Assurance function is utilised in monitoring risk are welcome to attend and participate at the AGM and any EGMs. management processes to determine whether internal controls The Group aims to ensure that the chairmen of the Audit, (operational, compliance and financial) are effectively designed Remuneration, Nominations and Health, Safety and Environmental and properly implemented. A risk-based approach is applied to Committees are available at the AGM to answer questions. The the implementation and monitoring of controls. The monitoring AGM provides an opportunity for shareholders to question the process also forms the basis for continually improving the risk Chairman and other directors on a variety of topics and further management process in the context of the Group’s overall information is provided at the AGM on all the Group’s principal goals. business activities. At each AGM, the Chairman reports details of all proxy votes lodged for each resolution after each show of hands. Group Risk Assurance plans and reports are reviewed by the Audit Committee together with external audit plans and any Accountability and audit business improvement opportunities that are recommended by The Board endeavours, in all its communications with the external auditors. shareholders, to present a balanced and understandable Virgin Rail Group has its own audit committee and internal audit assessment of the Company’s position and prospects. function. The Group’s risk management process does not The Board considers acceptance of appropriate risks to be an specifically cover Virgin Rail Group at present, but the Group integral part of business and unacceptable levels of risk are maintains an overview of the business’ risk management through avoided or reduced and, in some cases, transferred to third representation on the Board and audit committee. Stagecoach parties. Internal controls are used to identify and manage management representatives meet with representatives of Virgin acceptable levels of risk. The directors acknowledge their Rail Group to ensure that the joint venture follows appropriate responsibility for establishing and maintaining the Group’s risk management procedures. system of internal control. Although the system can provide Road King Infrastructure has its own audit committee and only reasonable and not absolute assurance of material internal audit function. misstatement or loss, the Group’s system is designed to provide the directors with reasonable assurance that any risks The Group’s Audit Committee review the financial statements of or problems are identified on a timely basis and dealt with Virgin Rail Group and Road King Infrastructure together with the appropriately. The Group has established an ongoing process of minutes, external audit presentations, management presentations risk review and certification by the business heads of each and internal audit presentations from the respective audit operating unit. committee meetings of these companies.

Certain of the Group’s businesses are subject to significant risk. Internal control Each identified business risk is assessed for its probability of The wider process described above, together with the key occurrence and its severity of occurrence. Where necessary, the procedures noted below, enables the directors and senior group

28 Corporate governance 2003

managers to confirm that they have reviewed the effectiveness * a commitment to best practice in external reporting. of the system of internal control of the Group during the year. * a competition compliance programme which has been The key procedures, which the directors have established, are as approved by the Board and which is subject to regular follows: monitoring.

* an annual budgeting process with regular re-forecasting of Auditors out-turn, identifying key risks and opportunities. All budgets Following the conversion of our auditors, are presented to a panel of the executive directors and senior PricewaterhouseCoopers, to a Limited Liability Partnership (LLP) group managers by each business unit’s management team, from 1 January 2003, PricewaterhouseCoopers resigned as before being approved by the Board prior to the auditors and the directors appointed its successor, commencement of the financial year. PricewaterhouseCoopers LLP. A resolution to re-appoint * reporting of financial information to the Board encompassing PricewaterhouseCoopers LLP as auditors to the Company, at profit and loss, cash flow, balance sheet and key performance remuneration to be fixed by the directors, will be proposed at indicators and operating ratios. All results are monitored this year’s Annual General Meeting. throughout the year by the Group executives. The Audit Committee, having considered the external auditors’ * a Risk Assurance function which reviews key business performance during their period in office, recommend processes and business controls, reporting directly to the Audit re-appointment. The audit fees of »0.7 million for Committee. PricewaterhouseCoopers LLP and non-audit related fees of »0.2m * third party reviews commissioned by the Group of areas were discussed by the Audit Committee and considered where significant inherent risks have been identified, such as appropriate given the current size of the Group and the level of treasury management, insurance provisioning, pensions corporate activity undertaken during the year. The Committee strategy and competition policy. believes the level of non-audit services does not impair the * a decentralised organisation structure with clearly defined objectivity of the auditors and that there is a clear benefit limits of responsibility and authority to promote effective and obtained from using professional advisors who have a good efficient operations. understanding of the Group’s operations. Other accounting firms * control over the activities of joint ventures and associated have been used where the Group recognises them as having undertakings through Stagecoach representation on the boards particular areas of expertise or where potential conflicts of of the entities together with regular contact between interest for the auditors are identified. Stagecoach management and the management of the relevant entities. Compliance with the Combined Code * a performance management appraisal system is in place which The Group has complied with the provisions of the Code covers over 100 of the Group’s senior management and is throughout the financial year except that one director who was based on agreed financial and other performance objectives, not independent of management was a member of the many of which incorporate identifying and managing risk. Remuneration Committee during the year. The Remuneration * significant emphasis is placed on cash flow management. Bank Committee now comprises four independent non-executive balances are reviewed on a daily basis, cash flows are directors and the director who was not independent is no longer compared to budget on a four-weekly basis and any material a member. variances between earnings and expected cash flows are investigated. Pension schemes * regular Board reporting on specific matters including pensions, The assets of the Group’s pension schemes are totally separate insurance, treasury management, foreign exchange, interest from the assets of the Group and are invested with independent and commodity exposures. The Board regulates treasury fund managers. There are ten trustees for the principal UK management policies and procedures. scheme of whom five are employee representatives nominated * defined capital expenditure and other investment approval by the members on a regional basis. The other trustees include procedures, including due diligence requirements where executive directors and senior Group and UK Bus executives. The material businesses are being acquired or divested. Company Secretary, who is an elected member of the NAPF’s * each operating unit maintains controls and procedures Investment Council, and who in 1998 was also re-elected for a appropriate to the business. It is a key requirement of the six year term to the 16-member board of the industry-wide procedures that a written certificate is provided annually by Railways Pension Scheme, acts as chairman of the trustees of the the managing director and financial manager of each business principal UK scheme. The auditors and actuaries of the principal confirming that they have reviewed the effectiveness of the UK pension schemes are both independent of the Group. Similar system of internal control during the year. As might be arrangements are in place for the South West Trains, Island Line, expected, a number of minor internal control weaknesses were Sheffield Supertram and two Virgin Rail Group sections of the identified by this procedure, all of which have been, or are Railways Pension Scheme. PricewaterhouseCoopers LLP does not being, addressed. None of the weaknesses have resulted in conduct the external audit of any significant pension schemes in any material losses, contingencies or uncertainties that would which the Group participates. require disclosure in the Group’s Annual Report. This process is PricewaterhouseCoopers LLP provided internal audit services to considered to be an integral part of the continuous the Railways Pension Scheme until 2002 when an in-house improvement of our risk management procedures. internal audit function was fully established instead.

29 Remuneration report 2003

The Board supports the principles of good corporate governance where necessary. In preparing this Remuneration Report, the Board relating to directors’ remuneration and has applied them as has followed the provisions in Schedule B of the Combined Code. described below. Performance graph In accordance with Schedule 7A ‘Directors’ Remuneration Report’ The graph below charts the performance of the Stagecoach of the Companies Act 1985, those paragraphs that have been Group Total Shareholder Return (TSR) (share value movement audited have been highlighted as such. plus reinvested dividends) over the past 5 years compared with that of the FTSE Transport All-Share Index, the FTSE Mid 250 Composition Index and the FTSE All-Share Index. We have included a further During the year ended 30 April 2003, the Remuneration graph on page 31 to highlight the Company’s more recent Committee was chaired by Robert Speirs and the other members performance, charting TSR for the 6 months up to 30 April 2003. were Russell Walls, Iain Duffin, Janet Morgan and Ann Gloag, all non-executive directors, a majority of whom are independent. In assessing the performance of the Company’s TSR the Board Iain Duffin was appointed as the new Chairman of the believes the comparator groups it has chosen represent a fair Remuneration Committee on 1 May 2003. Ann Gloag is no benchmark both in terms of the nature of the business activity longer a member of the Committee. The Committee, which was and size of company. established in December 1992, is responsible for considering the remuneration and terms and conditions of employment of the Remuneration policy executive directors, including the Chief Executive, on behalf of Our remuneration policy is consistent with our prior year policy, the Board and shareholders. which was approved by the shareholders at the 2002 AGM. In determining appropriate levels of remuneration for the The non-executives’ own fees and expenses are set by the Board executive directors, the Remuneration Committee aims to of directors as a whole. Non-executive directors do not hold any provide overall packages of terms and conditions that are share options, nor do they participate in any incentive plans or competitive in the UK and will attract, retain and motivate high pension schemes with the exception of Ann Gloag who receives quality executives capable of achieving the Stagecoach Group’s a pension accrued when she was an executive director. The objectives and to ensure that they are fairly rewarded for their members of the Remuneration Committee have no personal individual responsibilities and contributions to the Group’s overall interest in the matters to be decided other than as shareholders, performance. The Remuneration Committee believes that such no potential conflicts of interest arising from cross-directorships packages should contain significant performance related and no day-to-day involvement in running the businesses of the elements. Performance targets are established to achieve Stagecoach Group. In agreeing increases in non-executive director consistency with the interests of shareholders, with an fees payable from 1 May 2003, the Board approved the principle appropriate balance between short- and long-term targets. of encouraging non-executive directors to take up to 10% of Performance targets include not only traditional financial their annual fees in shares. indicators but also personal targets, successful investment, Both the constitution and operation of the Remuneration innovation, staff development, customer satisfaction and Committee comply with the principles incorporated in Schedule A achievement of regulatory requirements, including health and of the Combined Code, with the prior consent of shareholders safety and environmental targets.

Stagecoach TSR Comparative Performance since 1 May 1998

£ Stagecoach TSR FTSE Transport TSR FTSE A/S TSR FTSE 250 TSR

120

90

60

30

0 Jul 98 Oct 98 Jan 99 Apr 99 Jul 99 Oct 99 Jan 00 Apr 00 Jul 00 Oct 00 Jan 01 Apr 01 Jul 01 Oct 01 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03

30 Remuneration report 2003

Stagecoach TSR Comparative Performance since 31 October 2002

£ Stagecoach TSR FTSE Transport TSR FTSE A/S TSR FTSE 250 TSR 300

250

200

150

100

50 31 October 02 30 November 02 31 December 02 31 January 03 28 February 03 31 March 03 30 April 03

To this end, the Remuneration Committee reviews the existing The Remuneration Committee believes that remuneration remuneration of the executive directors in consultation with the packages should reward the efforts of all staff since a motivated Chief Executive making comparisons with peer companies of workforce is a key element of Group performance. The similar size and complexity and with other companies in the Committee recognises that executive directors bear greatest public transport industry in the UK and overseas. Proposals for responsibility for delivering corporate strategy which underpins the forthcoming year are then discussed in the light of the long-term sustainable performance. While the Remuneration growth prospects for the Stagecoach Group. The Remuneration Committee’s report focuses on incentive schemes for senior Committee is also kept informed of the salary levels of other executives, there are also a number of performance-related bonus senior executives employed by the Stagecoach Group and of schemes within group companies, in addition to the UK-only average earnings for all employees. With regard to pensions, the SAYE schemes. Remuneration Committee receives reports from the trustees and scheme actuaries regarding the cost of pension obligations on a Directors’ remuneration (audited) regular basis. Directors’ remuneration is shown in Table 1 (amounts in »000):

Table 1 Salary/fees Performance Benefits in kind Compensation Non-pensionable Total related bonus for loss of office allowances

2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 Executive directors Brian Souter 460 447 322 Nil 18 18 Nil Nil n/a n/a 800 465 Keith Cochrane* 81 338 Nil 85 8 18 543 Nil 108 81 740 522 Brian Cox* 37 206 Nil 16 4 13 Nil Nil n/a n/a 41 235 Graham Eccles 190 175 114 25 13 14 Nil Nil 26 16 343 230 Frank Gallagher* Nil 93 Nil Nil Nil Nil Nil Nil n/a n/a Nil 93 Martin Griffiths 180 150 108 25 20 19 Nil Nil 23 11 331 205 Non-executive directors Ewan Brown 27 25 Nil Nil Nil Nil n/a n/a n/a n/a 27 25 Ann Gloag 27 25 Nil Nil Nil Nil n/a n/a n/a n/a 27 25 Barry Sealey* Nil 14 Nil Nil Nil Nil n/a n/a n/a n/a Nil 14 Robert Speirs 72 25 Nil Nil Nil Nil n/a n/a n/a n/a 72 25 Russell Walls 27 25 Nil Nil Nil Nil n/a n/a n/a n/a 27 25 Janet Morgan 27 25 Nil Nil Nil Nil n/a n/a n/a n/a 27 25 Iain Duffin 27 16 Nil Nil Nil Nil n/a n/a n/a n/a 27 16 Total 1,155 1,564 544 151 63 82 543 Nil 157 108 2,462 1,905

*Resigned or retired prior to 30 April 2003. Non-pensionable allowances represent additional taxable remuneration paid to provide pension benefits.

31 Remuneration report 2003

Directors’ remuneration (audited) (continued) Directors’ pension benefits were as follows (amounts in »000):

Table 2 Additional accrued benefits Accrued pension Accrued lump sum Transfer value Increase in earned in the year of increase transfer (excluding inflation) value less Excluding Including directors’ inflation inflation 2003 2002 2003 2002 2003 2002 contributions Executive directors Brian Souter 51 60 209 192 348 305 138 147 116 Keith Cochrane* 63 63 84 68 252 205 111 54 105 Brian Cox* 4 4 108 107 143 140 18 123 17 Graham Eccles 11 11 7 4 20 12 26 22 25 Frank Gallagher* Nil Nil n/a n/a n/a n/a n/a n/a n/a Martin Griffiths 9 10 19 16 58 50 9 6 8

*Resigned or retired prior to 30 April 2003

In addition to their remuneration detailed in Table 1, Graham Keith Cochrane was paid »543,000 by the company as Eccles and Martin Griffiths each received 257 free shares during contractual compensation for loss of office and other benefits, as the year ended 30 April 2003 under the Stagecoach Profit disclosed on page 31, following his resignation from the Board on Sharing Scheme. 21 July 2002. He is also entitled to an annual pension of »84,150 from the age of 64 and a lump sum on retirement of »252,450. Keith Cochrane, Graham Eccles, Martin Griffiths and Frank Ann Gloag retired as an executive director on 30 April 2000 and, Gallagher were not members of the Group pension schemes in addition to her fees as a non-executive director, receives an before the introduction of the pensionable salary cap in June annual pension of »90,000 from 1 May 2000. 1989. In respect of Keith Cochrane, pension arrangements were established through FURBS, based upon the independent advice Directors who are members of the Stagecoach Group Pension of actuaries, to provide final salary benefits commensurate with Scheme have the option to pay additional voluntary market practice for equivalent executive positions. These contributions (‘‘AVCs’’). Neither the contributions nor the arrangements were put into place in April 1997. In respect of resulting benefits of any AVCs are included in the table above. Graham Eccles and Martin Griffiths, they are each paid a non- pensionable allowance which is equivalent to the cost of a Basic salary money purchase contribution of 20% of their salary in excess The salary of individual executive directors is reviewed at 1 May of the pensionable salary cap. each year. Account is taken of individual achievements, together with any changes in responsibilities that may have occurred and, During the year ended 30 April 2002, the remaining proceeds as stated above, the salaries for similar roles in comparable of a small self-administered money purchase scheme (SSAS) companies. established for Brian Souter and Ann Gloag in 1992 were transferred into the Stagecoach Group Pension Scheme to secure Performance related bonuses additional final salary type benefits equivalent in actuarial value An annual discretionary bonus scheme for the executive directors to the proceeds transferred. The additional benefits are reflected was first introduced in 1993; payments take account of the in the disclosure of Brian Souter’s accrued benefits above. In Ann achievement of operating profits and after-tax results, specific Gloag’s case, her share of the SSAS assets was used to secure individual performance and additional responsibilities. Bonuses are additional money purchase benefits equivalent in actuarial value non-pensionable. to the proceeds transferred towards providing her total pension In making its judgement of performance for the last financial of »90,000 per annum referred to below. Employer contributions year the Remuneration Committee had particular regard to the to the SSAS ceased in 2000 for Ann Gloag and in 2001 for results as recorded elsewhere in the Annual Report, and relative Brian Souter. total return to shareholders over the year, as well as other strategic developments and operating improvements. The Prior to his resignation, on 21 July 2002, Keith Cochrane maximum potential bonus for executive directors in 2002/2003 participated in The Stagecoach Executive Directors’ Long Term ranged from 60% to 75% of basic salary. Actual bonuses Bonus Scheme. An additional annual bonus of »75,000 per awarded ranged from 60% to 70%. financial year, for each of the five years commencing 1 May 1998, was payable subject to growth in earnings per share in Benefits in kind each financial year outperforming inflation by at least 5%. A Certain executive directors receive car, fuel, telephone and bonus was only payable under this scheme for the year ended healthcare taxable benefits. The value of such benefits is 30 April 1999 and no amount was payable in subsequent years included within the directors’ remuneration table on page 31 as the performance criteria were not met. of this report.

32 Remuneration report 2003

Pensions during the year, are shown in Table 3. As permitted, certain share Under the terms of their service agreements, executive directors option awards have been aggregated in Table 3 to avoid an are entitled to become members of one of the Stagecoach excessively lengthy report. For each director, ‘‘in the money’’ and Group’s defined benefit pension schemes or, if preferred, to ‘‘out of the money’’ share options are shown separately. All of receive payment of a proportion of salary for personal pension the share options were granted for nil consideration. The mid- schemes. The Stagecoach Group pension schemes are designed to market price of the underlying shares at 30 April 2003 was »0.44 provide a pension for executives of up to two-thirds of final per share. The Company’s shares traded in the range »0.125 to pensionable salary completed up to normal retirement age, »0.805 during the year to that date. subject to Inland Revenue limits. Share options are subject to certain performance criteria as Martin Griffiths and Graham Eccles are subject to the earnings discussed on page 34. cap so the Company makes a cash contribution to them for the No director realised gains during the year by exercising options. part of their salary which exceeds the cap. Only basic salary is pensionable. Life assurance of four times basic annual salary is In addition to the share options shown in Table 3, on 1 April provided under the Group pension scheme. 1998 and 1 April 2002, the directors detailed in Table 4 were granted options under the Group’s Save As You Earn scheme following an invitation to all eligible UK employees: Share option schemes and long term incentive schemes (audited) The interests of directors who have options to subscribe for Further information on these options is detailed in note 23a to ordinary shares of the company, together with movements the accounts on page 66.

Table 3 At 1 May Granted At 30 April Average Date from Expiry 2002 number 2003 exercise which date number number price exercisable »

Keith Cochrane 3,182,818 Nil 3,182,818 0.9823 October 1998 July 2003* Nil 960,000 960,000 0.3750 July 2002 July 2003* Brian Cox 1,282,074 Nil 1,282,074 1.4316 October 1999 July 2003* Graham Eccles 633,120 Nil 633,120 0.9050 October 2001 June 2008 Nil 1,183,704 1,183,704 0.3126 July 2005 December 2009 Martin Griffiths 761,339 Nil 761,339 0.7875 October 2001 June 2008 Nil 1,146,667 1,146,667 0.3140 July 2005 December 2009 Brian Souter Nil 2,930,371 2,930,371 0.3140 July 2005 December 2009

*Upon leaving the Company, both Keith Cochrane and Brian Cox had 12 months from that date to exercise any options previously granted to them. Market price exceeds exercise price as at 30 April 2003.

Table 4 At 1 May Lapsed At 30 April 2002 no. of 2003 no. of ordinary ordinary no. of ordinary shares shares shares

Keith Cochrane 13,605 13,605 Nil Martin Griffiths 14,843 Nil 14,843 Ann Gloag 12,022 12,022 Nil Graham Eccles 15,833 Nil 15,833

33 Remuneration report 2003

In addition to their individual interests in shares the executive Grossart Limited, held at 30 April 2003 8,026,665 (2002 ^ directors were, for Companies Act purposes, regarded as 8,026,665) ordinary shares in the Company. interested in 4,901,652 shares held at 30 April 2003 by the Stagecoach Group QUEST. Directors’ service agreements The details of the executive directors’ service contracts are The Remuneration Committee has made awards to executive summarised in the table below: directors under three schemes:

(i) The Stagecoach Profit Sharing Scheme ^ established in Name of Date of Notice period September 1991, this scheme was used to reward UK director contract employees in the Group with free shares based on up to Brian Souter 2 April 1993 12 months 3% per annum of profits before taxation of the relevant (amended 26 January 1996) parts of the Group. Two of the directors were awarded Graham Eccles 27 October 2000 12 months shares under this scheme in 2002/2003. Martin Griffiths 8 August 2000 12 months Rewards were based on divisional profits and a minimum Keith Cochrane 31 March 2000 contract ended service period of 12 months was required for an award to Brian Cox 2 April 1993 contract ended be made. This Scheme was closed on the 31 December 2002. It is the company’s policy that executive directors should have 12 month rolling service contracts providing for a maximum of (ii) The Stagecoach Executive Share Option Scheme ^ one year’s notice. Due to the nature of the Group’s businesses, established in March 1992 when it was formally approved the service contracts contain restrictive covenants that will be by the Inland Revenue. This scheme was also used to rigorously applied. reward senior executives throughout the Group. Awards have in the past been made to certain executive directors If an executive director’s contract is terminated by the company, as a proportion of annual salary. the costs for which the Company is liable will vary depending on length of service and are subject to mitigation. The costs will Awards are made at the Board’s discretion. include a termination payment of up to one times salary only (iii) The Stagecoach Unapproved Executive Share Option and certain benefits and retirement benefits funded under the Scheme ^ established in September 1997, when it was Company’s pension schemes. approved by shareholders at the AGM, to take account of the changed tax treatment announced in 1995 and Outside appointments confirmed in the Finance Act 1996. The scheme was Under the terms of their service agreements, executive directors amended by shareholder approval at an Extraordinary require Board approval before accepting any external General Meeting in January 2002. This scheme is also used appointment. Details of remuneration earned where an executive to reward senior executives throughout the Group, at the director serves as a non-executive director elsewhere are Board’s discretion. Normal options awarded under the disclosed in note 27 to the accounts on page 74. Such earnings scheme are exercisable between three and seven years, are paid to the Group and not to individual directors. but the scheme also permits ‘‘super options’’ exercisable between five and seven years. Exercise of normal options Remuneration policy approval is subject to earnings per share outperforming inflation An ordinary resolution to receive this Remuneration Report and over three consecutive financial years by 2% per annum to consider and, if thought fit, approve the Board’s remuneration cumulatively (for options awarded up until June 2001) and policy will be proposed at the 2003 Annual General Meeting. by 3% to 5% per annum cumulatively for more recent options. Exercise of super options is subject to On behalf of the Board achievement of top quartile total shareholders’ return compared to other Transport Sector shares in the UK (excluding FTSE 100). Awards were made to four directors under this scheme in 2002/2003. IAIN DUFFIN Transactions in which directors have had a material interest (audited) Chairman of the Remuneration Committee Ewan Brown (a non-executive director) is an executive director of 25 June 2003 Noble Grossart Limited which provided advisory services to the Group during the year. Total fees paid to Noble Grossart Limited during the year, amounted to »20,000 (2002 ^ »15,000). Noble Grossart Investments Limited, a subsidiary of Noble

34 Independent Auditors’ Report to the Members of Stagecoach Group plc 2003

Independent auditors’ report to the members of Stagecoach We review whether the Corporate governance statement reflects Group plc the Company’s compliance with the seven provisions of the We have audited the accounts which comprise the consolidated Combined Code specified for our review by the Listing Rules of profit and loss account, the consolidated balance sheet, the the Financial Services Authority, and we report if it does not. We Company balance sheet, the consolidated cash flow statement, are not required to consider whether the Board’s statements on the reconciliation of movements in consolidated shareholders’ internal control cover all risks and controls, or to form an opinion funds, the consolidated statement of total recognised gains and on the effectiveness of the Company’s or Group’s corporate losses, and the related notes to the accounts. We have also governance procedures or its risk and control procedures. audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the Remuneration report (‘the Basis of audit opinion auditable part’). We conducted our audit in accordance with auditing standards issued by the Auditing Practices Board. An audit includes Respective responsibilities of directors and auditors examination, on a test basis, of evidence relevant to the amounts The directors’ responsibilities for preparing the annual report and and disclosures in the accounts and the auditable part of the the accounts in accordance with applicable United Kingdom law Remuneration report. It also includes an assessment of the and accounting standards are set out in the statement of significant estimates and judgements made by the directors in directors’ responsibilities. The directors are also responsible for the preparation of the accounts, and of whether the accounting preparing the Remuneration report. policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. Our responsibility is to audit the accounts and the auditable part of the Remuneration report in accordance with relevant legal and We planned and performed our audit so as to obtain all the regulatory requirements and United Kingdom Auditing Standards information and explanations which we considered necessary in issued by the Auditing Practices Board. This report, including the order to provide us with sufficient evidence to give reasonable opinion, has been prepared for and only for the Company’s assurance that the accounts and the auditable part of the members as a body in accordance with Section 235 of the Remuneration report are free from material misstatement, Companies Act 1985 and for no other purpose. We do not, in whether caused by fraud or other irregularity or error. In forming giving this opinion, accept or assume responsibility for any other our opinion we also evaluated the overall adequacy of the purpose or to any other person to whom this report is shown or presentation of information in the accounts. in to whose hands it may come save where expressly agreed by our prior consent in writing. Opinion In our opinion: We report to you our opinion as to whether the accounts give a * the accounts give a true and fair view of the state of affairs true and fair view and whether the accounts and the auditable of the Company and the Group at 30 April 2003 and of the part of the Remuneration report have been properly prepared in loss and cash flows of the Group for the year then ended; accordance with the Companies Act 1985. We also report to you * the accounts have been properly prepared in accordance with if, in our opinion, the directors’ report is not consistent with the the Companies Act 1985; and accounts, if the Company has not kept proper accounting * those parts of the Remuneration report required by Part 3 of records, if we have not received all the information and Schedule 7A to the Companies Act 1985 have been properly explanations we require for our audit, or if information specified prepared in accordance with the Companies Act 1985. by law regarding Remuneration and transactions is not disclosed.

We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. The other information comprises only the Chairman’s Statement, the Chief Executive’s review, the PRICEWATERHOUSECOOPERS LLP Operating review, the Finance Director’s review, the Corporate Chartered Accountants and Registered Auditors governance statement, the Directors’ report and the unaudited Glasgow part of the Remuneration report. 25 June 2003

35 Consolidated profit and loss account Year ended 30 April 2003

2003 2002 Performance Goodwill Performance Goodwill pre goodwill and pre goodwill and and exceptional Results for and exceptional Results for Notes exceptionals items the year exceptionals items the year »m »m »m »m »m »m

Turnover: Group and share of joint ventures 2 2,076.6 Nil 2,076.6 2,111.4 Nil 2,111.4 Less: Share of joint ventures’ turnover (277.9) Nil (277.9) (263.7) Nil (263.7)

Group turnover 1,798.7 Nil 1,798.7 1,847.7 Nil 1,847.7 Operating costs (including asset impairment) 2 (1,752.6) (603.6) (2,356.2) (1,753.8) (61.3) (1,815.1) Other operating income 3 87.7 Nil 87.7 54.2 Nil 54.2

Operating (loss)/profit of Group companies 2 133.8 (603.6) (469.8) 148.1 (61.3) 86.8 Share of operating loss of joint ventures 2.6 (8.7) (6.1) 6.1 (8.4) (2.3) Share of operating profit from interest in associates 10.0 (0.3) 9.7 12.4 (0.4) 12.0

Total operating (loss)/profit: Group and share of joint ventures and associates 2 146.4 (612.6) (466.2) 166.6 (70.1) 96.5 (Loss)/profit on sale of properties Nil (0.5) (0.5) Nil 0.5 0.5 Profit on disposal of overseas operations Nil Nil Nil NIl 4.8 4.8

(Loss)/profit on ordinary activities before interest and taxation 146.4 (613.1) (466.7) 166.6 (64.8) 101.8 Finance charges (net) 4 (33.5) Nil (33.5) (59.8) Nil (59.8)

(Loss)/profit on ordinary activities before taxation 5 112.9 (613.1) (500.2) 106.8 (64.8) 42.0 Taxation on (loss)/profit on ordinary activities 7 (28.8) 3.8 (25.0) (24.2) 9.2 (15.0)

(Loss)/profit on ordinary activities after taxation 84.1 (609.3) (525.2) 82.6 (55.6) 27.0 Dividends 8 (34.3) Nil (34.3) (34.1) Nil (34.1)

Retained loss for the year 49.8 (609.3) (559.5) 48.5 (55.6) (7.1)

(Loss)/earnings per share ^ Adjusted/Basic 9 6.4p (40.0)p 6.3p 2.1p

^ Diluted 9 6.4p (40.0)p 6.3p 2.1p

A statement of movements on the profit and loss account reserve is given in note 10.

All operations in the years ended 30 April 2003 and 30 April 2002 are classed as continuing.

The accompanying notes form an integral part of this consolidated profit and loss account.

36 Consolidated balance sheet As at 30 April 2003

Notes 2003 2002 »m »m

Fixed assets Intangible assets 11 206.9 665.4 Tangible assets 12 851.6 1,108.9 Investments 13 ^ Investment in joint ventures Goodwill 72.7 81.4 Share of gross assets 167.5 136.7 Share of gross liabilities (122.0) (97.4) Shareholder loan notes 10.4 10.0

13 128.6 130.7

^ Investment in associates 13 70.0 72.8 ^ Other investments 13 2.7 3.2

1,259.8 1,981.0

Current assets Stocks 15 38.1 50.9 Debtors and prepaid charges ^ due within one year 16 192.3 228.5 ^ due after more than one year 16 59.9 54.2 Cash at bank and in hand 164.7 150.0

455.0 483.6 Creditors: Amounts falling due within one year 17 (504.2) (524.0)

Net current liabilities (49.2) (40.4)

Total assets less current liabilities 1,210.6 1,940.6 Creditors: Amounts falling due after more than one year 17 (640.7) (808.1) Provisions for liabilities and charges ^ Joint ventures ^ thetrainline.com 21 Share of gross assets 5.3 5.1 Share of gross liabilities (27.9) (21.8) ^ Other provisions 21 (230.2) (206.7)

Net assets 2 317.1 909.1

Capital and reserves Equity share capital 22 6.6 6.6 Share premium account 24 386.1 384.4 Profit and loss account 24 (77.3) 514.8 ESOP distribution reserve 24 Nil 1.6 Capital redemption reserve 24 1.7 1.7

Shareholders’ funds ^ Equity 317.1 909.1

Signed on behalf of the Board on 25 June 2003

BRIAN SOUTER MARTIN A GRIFFITHS Chief Executive Finance Director

The accompanying notes form an integral part of this consolidated balance sheet.

37 Company balance sheet As at 30 April 2003

Notes 2003 2002 »m »m

Fixed assets Tangible assets 12 7.8 8.5 Investments 13 643.2 373.9

651.0 382.4

Current assets Debtors and prepaid charges ^ due within one year 16 21.5 22.3 ^ due after more than one year 16 551.8 1,656.9 Cash at bank and in hand 5.2 Nil

578.5 1,679.2 Creditors: Amounts falling due within one year 17 (210.6) (177.2)

Net current assets 367.9 1,502.0

Total assets less current liabilities 1,018.9 1,884.4 Creditors: Amounts falling due after more than one year 17 (563.4) (812.0) Provisions for liabilities and charges 21 (3.6) (8.0)

Net assets 451.9 1,064.4

Capital and reserves Equity share capital 22 6.6 6.6 Share premium account 24 386.1 384.4 Profit and loss account 24 57.5 670.1 ESOP distribution reserve 24 Nil 1.6 Capital redemption reserve 24 1.7 1.7

Shareholders’ funds ^ Equity 451.9 1,064.4

Signed on behalf of the Board on 25 June 2003

BRIAN SOUTER MARTIN A GRIFFITHS Chief Executive Finance Director

The accompanying notes form an integral part of this balance sheet.

38 Consolidated cash flow statement Year ended 30 April 2003

Notes 2003 2002 »m »m

Net cash inflow from operating activities 25 272.2 256.9 Dividends from joint ventures and associates 5.3 5.0

Returns on investments and servicing of finance Interest paid (52.6) (61.7) Interest element of hire purchase and lease finance (4.7) (7.6) Interest received 5.4 8.4

Net cash outflow from returns on investments and servicing of finance (51.9) (60.9)

Taxation (7.8) (16.7)

Capital expenditure and financial investment Purchase of tangible fixed assets (52.9) (82.4) Sale of tangible fixed assets 20.1 5.4

Net cash outflow from capital expenditure and financial investment (32.8) (77.0)

Acquisitions and disposals Acquisition of subsidiaries 25 (10.1) (25.2) Net cash acquired with subsidiaries Nil 0.3 Purchase of goodwill (0.8) (0.1) Purchase of investments in joint ventures and associates (0.9) (1.5) Purchase of other investments Nil (0.3) Cash of disposed subsidiaries 13 Nil (0.8) Disposal of subsidiaries and other businesses 13 7.0 16.1 Disposal of other investments Nil 2.0

Net cash outflow from acquisitions and disposals (4.8) (9.5)

Equity dividends paid (27.6) (49.8)

Net cash inflow before financing 152.6 48.0

Financing Sale of tokens 12.9 14.8 Redemption of tokens (10.8) (13.4) Issue of share capital for cash Nil 1.3 (Increase)/decrease in collateral balances (32.1) 38.2 Decrease in borrowings (90.9) (12.2) Repayments of hire purchase and lease finance (44.4) (48.2)

Net cash outflow from financing (165.3) (19.5)

(Decrease)/increase in cash during the year 25 (12.7) 28.5

Free cash flow 217.8 184.3

Free cash flow per share 16.6p 14.1p

Free cash flow comprises net cash inflow from operating activities, dividends from joint ventures and associates, net cash outflow from returns on investments and servicing of finance, and taxation.

The accompanying notes form an integral part of this consolidated cash flow statement.

39 Consolidated statement of total recognised gains and losses Year ended 30 April 2003

2003 2002 »m »m

(Loss)/profit for the financial year (525.2) 27.0 Translation differences on foreign currency net investments (26.6) (5.5) UK tax effect of translation differences on foreign currency net investments (6.4) (4.8) Share of other recognised gains and losses of associates (0.1) (0.2)

Total recognised gains and losses relating to the year (558.3) 16.5

There are no recognised gains and losses of joint ventures other than the Group’s share of their profits or losses for each financial year.

Reconciliation of movements in consolidated shareholders’ funds Year ended 30 April 2003

2003 2002 »m »m

(Loss)/profit for the financial year (525.2) 27.0 Dividends (34.3) (34.1)

(559.5) (7.1) Goodwill sold, previously written off to reserves 0.5 3.7 Other recognised gains and losses relating to the year ^ translation differences on foreign currency net investments (26.6) (5.5) ^ UK tax effect of translation differences on foreign currency net investments (6.4) (4.8) ^ share of other recognised gains and losses of associates (0.1) (0.2) Share capital issued less costs 1.7 2.9 ESOP distribution reserve decrease (1.6) (0.2)

Net reduction in shareholders’ funds (592.0) (11.2)

Opening shareholders’ funds 909.1 920.3

Closing shareholders’ funds 317.1 909.1

The accompanying notes form an integral part of these statements.

40 Notes to the accounts 2003

Note 1 Statement of accounting policies

A summary of the principal accounting policies is set out below. All principal accounting policies have been applied consistently throughout the year and the preceding year.

(a) Basis of accounting

The accounts have been prepared under the historical cost convention and in accordance with applicable accounting standards in the United Kingdom.

(b) Presentation of profit and loss account

Where applicable, profit and loss account information has been presented in a columnar format, which separately highlights goodwill amortisation and exceptional items. This is intended to enable the users of the accounts to determine more readily the impact of goodwill and exceptional items on the results of the Group.

(c) Basis of consolidation

The consolidated accounts include the accounts of the Company, its subsidiary undertakings, joint ventures and associates made up to 30 April in each year except as noted below:

Associates ^ The Group’s share of the profit of Road King Infrastructure Limited is based on the results of that company for the year to 31 December. The Group’s share of the profit/loss of other associates is based on the results for the period covered by the Group’s financial year.

The consolidated profit and loss account includes the results of businesses purchased from the effective date of acquisition and excludes the results of discontinued operations and businesses sold from the effective date of disposal. No profit and loss account is presented for the parent company, Stagecoach Group plc, as permitted by Section 230 of the Companies Act 1985.

(d) Intangible assets

In accordance with FRS 10 ‘‘Goodwill and Intangible Assets’’, goodwill arising on acquisitions after 30 April 1998 is recorded as an asset on the balance sheet at cost less amortisation. Each acquisition is reviewed and where the goodwill has a finite economic life, goodwill is amortised over that life. In estimating the useful economic life of goodwill, account has been taken of the nature of the business acquired, stability of the industry sector, extent of barriers to entry and expected future impact of competition. The useful life of goodwill arising on the acquisitions made is estimated by the directors to be between 5 and 20 years. Provision is made for any impairment, with impairment reviews being undertaken in accordance with FRS 11, ‘‘Impairment of fixed assets and goodwill’’. Goodwill arising on acquisitions in the year ended 30 April 1998 and earlier periods was written off directly to reserves in accordance with the accounting standard then in force.

As permitted by the current accounting standard, the goodwill previously written off to reserves has not been reinstated in the balance sheet. On the disposal of a subsidiary undertaking, goodwill previously written off directly to reserves in respect of such an undertaking is transferred to the profit and loss account and constitutes part of the gain or loss to the Group arising on disposal.

Fair value accounting adjustments have been made to take account of the revaluation of certain fixed assets on an existing use basis, discounting of long term liabilities (but not deferred tax provisions) and other changes in accounting policies required to comply with Group policies. Fair value adjustments based on provisional estimates are amended in the following year’s accounts where necessary, with a corresponding adjustment to goodwill, in order to refine adjustments to reflect further evidence gained post-acquisition.

41 Notes to the accounts 2003

Note 1 Statement of accounting policies (continued)

(e) Tangible fixed assets Tangible fixed assets are shown at their original historic cost or fair value on acquisition net of depreciation and any provision for impairment as set out in note 12. Depreciation is provided at rates calculated to write off the cost or valuation less estimated residual value of each asset on a straight-line basis over their estimated useful lives, as follows: Heritable and freehold buildings and long leasehold properties 50 years Short leasehold properties Over period of lease Public service vehicles (‘‘PSVs’’) and transportation equipment 7 to 16 years, depending on type IT and other equipment, furniture and fittings 5 to 10 years Motor cars and other vehicles 3 to 5 years Heritable and freehold land is not depreciated. The need for any fixed asset impairment write-down is assessed by comparison of the carrying value of the asset against the higher of net realisable value or value in use.

(f) Pre-contract costs In accordance with UITF Abstract 34, ‘‘Pre-contract costs’’, the costs associated with securing new rail franchises are expensed as incurred, except where it is virtually certain that a contract will be awarded in which case they are recognised as an asset and are charged to the profit and loss account over the life of the franchise.

(g) Investments Fixed asset investments are shown at cost less provision for impairment. In the Company’s accounts investments in subsidiary undertakings are stated at cost, less provision for impairment.

(h) Associates and Joint Ventures In the Group accounts the investments in associates are accounted for using the equity method and investments in joint ventures are accounted for using the gross equity method. The consolidated profit and loss account includes the Group’s share of associates’ and joint ventures’ profits less losses, while the Group’s share of associates’ and joint ventures’ net assets is shown in the consolidated balance sheet. Where the Group has an interest in a joint venture’s net liabilities, the Group’s share of net liabilities is classified within provisions for liabilities and charges. Goodwill arising on the acquisition is accounted for in accordance with the policy set out above. Any unamortised goodwill is included in the carrying value of the Group’s investments.

(i) Stocks

Stocks of parts and consumables are stated at the lower of cost and net realisable value after making due allowance for obsolete or slow moving items. Taxicabs which are held for sale or lease to independent contractors are included within stocks.

(j) Hire purchase and lease obligations

Assets acquired under hire purchase and finance leases are recorded in the balance sheet as assets at the equivalent of the purchase price and as obligations to pay hire purchase capital instalments or future lease rentals. Obligations arising from hire purchase contracts and finance leases represent the total of the capital payments outstanding at the date of the balance sheet. Future finance charges are not included. Future finance charges are calculated in relation to the reducing balance of capital outstanding throughout the contract and charged to the profit and loss account on the same basis. Assets capitalised under lease finance and other similar contracts are depreciated over the shorter of the lease terms and their useful economic lives. Assets capitalised under hire purchase contracts are depreciated over their useful economic lives. Rentals under operating leases are charged on a straight-line basis over the lease term. The principal restriction on property held under finance or hire purchase agreements is a restriction on the right to dispose of the property during the period of the agreement.

42 Notes to the accounts 2003

Note 1 Statement of accounting policies (continued)

(k) Taxation

Corporation tax is provided on taxable profits at the current rate applicable. Tax charges and credits are accounted for through the same primary statement (either the profit and loss account or the statement of total recognised gains and losses) as the related pre-tax item.

In accordance with FRS 19, ‘‘Deferred Taxation’’, full provision is made for deferred tax on a non-discounted basis in respect of all timing differences except those arising from the revaluation of fixed assets where there is no binding sale agreement and undistributed profits of overseas subsidiaries and associates.

Deferred tax is calculated at rates at which it is estimated the tax will arise. Deferred tax assets are recognised to the extent they are more likely than not to be recovered.

(l) Turnover

Turnover represents gross revenue earned from public transport services and operating lease rentals receivable, and excludes future payments received on account. Amounts receivable for tendered services and concessionary fare schemes are included as part of turnover. Where appropriate, amounts are shown net of rebates and VAT. Revenues incidental to the Group’s principal activity (including advertising income and maintenance income) are reported as miscellaneous revenue.

Bus and rail revenue is recognised at the time of travel. Bus revenue from local authority and similar contracts is recognised on a straight-line basis over the period of the contract.

Income from advertising and other activities is recognised as the income is earned.

Compensation receivable by UK Rail companies in respect of service disruption under the performance regime provisions of the track access agreements with Network Rail is recognised over the expected period of disruption and is shown as other operating income.

(m) Tokens

Tokens issued by National Transport Tokens Limited, a subsidiary of the Group, are credited to a token redemption provision. Redemptions are offset against this and associated handling commission paid to third parties is included in operating costs. Funds from the sale of tokens required for token redemption are included as a financing activity in the consolidated cash flow statement.

The estimation of the balance sheet provision for token redemption is based on the value of tokens issued by the Group but not yet redeemed at the balance sheet date. Allowance is made for the estimated proportion of tokens in issue that will never be redeemed. This allowance is estimated with reference to historic redemption rates. At 30 April 2003, it has been estimated that 97% (2002 ^ 97%) of tokens in issue will be redeemed.

(n) Pension costs

The Group provides for and funds pension liabilities on the advice of external actuaries and makes payments to segregated funds managed by specialist financial institutions.

Independent actuarial valuations on a going concern basis are carried out at least every three years. The employer costs of providing retirement benefits to employees are charged to the profit and loss account on a systematic basis so as to produce a substantially level percentage of the current and future pensionable payroll. Variations from regular cost arising from any excess or deficiency of the actuarial value of the pension funds’ assets over the actuarial valuation of the pension funds’ liabilities are allocated to the profit and loss account over the employees’ average remaining service lives. Any timing difference between amounts charged in the profit and loss account and paid to the pension funds is shown in the balance sheet as an asset or a liability.

Details of the principal Group pension schemes are given in note 26d.

The transitional disclosures required under FRS 17, ‘‘Retirement Benefits’’, are also included in note 26d.

43 Notes to the accounts 2003

Note 1 Statement of accounting policies (continued)

(o) Foreign currencies

The accounts of overseas subsidiaries and associate undertakings are maintained in the local currencies in which the subsidiaries transact business. The trading results of overseas subsidiary and associate undertakings are translated into sterling using average rates of exchange. Exchange differences arising on the translation of the opening net assets and results of overseas operations, together with exchange differences arising on foreign currency borrowings and foreign currency derivatives, to the extent they hedge the Group’s investment in overseas operations, are dealt with in the statement of total recognised gains and losses.

Foreign currency assets and liabilities are translated into sterling at the rates of exchange ruling at the year end except in those instances where forward contracts are in place, in which case the contract rate is used. Foreign currency transactions arising during the year are translated into sterling at the rate of exchange ruling on the date of the transaction. Any exchange differences so arising are dealt with through the profit and loss account.

Principal rates of exchange 2003 2002

New Zealand Dollar Year end rate 2.86 3.40 Average rate 3.10 3.26 Hong Kong Dollar Year end rate 12.46 11.37 Average rate 12.15 11.17 US Dollar Year end rate 1.60 1.46 Average rate 1.56 1.43

(p) Accounting for finance costs and debt

Finance costs of debt are recognised in the profit and loss account over the term of such instruments at a constant rate on the carrying amount.

Debt is initially stated at the amount of the net proceeds after deduction of issue costs. The carrying amount is increased by the finance costs that are recognised in the profit and loss account in respect of each accounting period. The carrying amount is reduced by amounts paid in respect of finance costs and/or repayments of principal.

(q) Government grants

Government grants relating to tangible fixed assets are treated as deferred income and released to the profit and loss account over the expected useful lives of the assets concerned. Other grants are credited to the profit and loss account as the related expenditure is expensed.

Revenue grants receivable in respect of the operation of rail franchises in the UK are charged or credited to the profit and loss account in the year in which the related expenditure is recognised in the profit and loss account or where they do not relate to any specific expenditure, in the year in which the grant is receivable. These rail franchise grants are classified within Other Operating Income.

44 Notes to the accounts 2003

Note 1 Statement of accounting policies (continued)

(r) Derivatives and financial investments Financial assets are recognised in the balance sheet at the lower of cost and net realisable value. The Group uses derivative financial instruments to reduce exposure to foreign exchange risk, commodity price risk and interest rate movements. The Group does not hold or issue derivative financial instruments for speculative purposes. Forward foreign exchange contracts are used to manage exposure to fluctuations in currency rates and to hedge overseas net investments. For a forward foreign exchange contract to be treated as a hedge the instrument must be related to actual foreign currency assets or liabilities or to a probable commitment. It must involve the same currency or similar currencies as the hedged item and must also reduce the risk of foreign currency exchange movements on the Group’s operations. Gains and losses arising on these contracts are either held off balance sheet or deferred on balance sheet and recognised either in the profit and loss account or as adjustments to the carrying amount of fixed assets, only when the hedged transaction has itself been reflected in the Group’s financial statements. Gains and losses arising on derivatives hedging overseas net investments are recognised in the Statement of Total Recognised Gains and Losses. For interest rate and commodity swaps to be treated as a hedge the instrument must be related to actual assets or liabilities or a probable commitment and must change the nature of the interest rate or fuel cost by converting a fixed rate to a variable rate or vice versa. Cash flows under these swaps are recognised by adjusting net interest payable and fuel costs over the periods of the contracts. Gains and losses arising from the termination of these contracts are deferred on balance sheet and amortised to the profit and loss account over the remaining period of the related hedged item or recognised immediately in the profit and loss account where the hedged item no longer exists. If an instrument ceases to be accounted for as a hedge, for example because the underlying hedged position no longer exists or the hedge is no longer effective, provision is made for any fair value loss on the instrument at that time.

(s) Marketing costs Marketing costs incurred during the start up phase of a new activity are charged to the profit and loss account as incurred.

(t) Insurance The Group receives claims in respect of traffic incidents and employee claims. The Group protects against the cost of such claims through third party insurance policies. An element of the claims are not insured as a result of the ‘‘excess’’ on insurance policies. Provision is made on a discounted basis for the estimated cost to the Group (net of insurance recoveries) to settle claims for incidents occurring prior to the balance sheet date. The estimation of the balance sheet insurance provisions is based on an assessment of the expected settlement on known claims together with an estimate of settlements that will be made in respect of incidents occurring prior to the balance sheet date but that have not yet been reported to the Group.

Note 2 Segmental analysis

(a) Turnover 2003 2002 »m »m

Continuing operations UK Bus 598.4 567.9 Overseas Bus 183.7 194.7 Coach USA 603.0 682.3

Total bus continuing operations 1,385.1 1,444.9 Rail 413.6 402.8

Group turnover ^ continuing operations 1,798.7 1,847.7 Share of joint ventures’ turnover ^ Train operating companies 276.1 261.2 ^ thetrainline.com 11.0 11.7 ^ Elimination of inter-segment turnover (9.2) (9.2)

Group turnover and share of joint ventures’ turnover 2,076.6 2,111.4

Turnover of »183.7m (2002 ^ »194.7m) for the continuing Overseas Bus segment includes amounts of »132.3m (2002 ^ »148.6m) in relation to Citybus, which was disposed of after 30 April 2003.

Due to the nature of the Group’s business, the origin and destination of turnover is the same in all cases.

45 Notes to the accounts 2003

Note 2 Segmental analysis (continued)

(b) (i) Operating (loss)/profit 2003 2002 Restated (see below) Performance Goodwill Results for Performance Goodwill Results for pre goodwill and the year pre goodwill and the year and exceptional and exceptional exceptionals items exceptionals items »m »m »m »m »m »m

Continuing operations UK Bus 67.0 Nil 67.0 62.7 Nil 62.7 Overseas Bus 30.3 Nil 30.3 33.4 Nil 33.4 Coach USA 14.0 (575.0) (561.0) 38.4 (19.6) 18.8

Total bus continuing operations 111.3 (575.0) (463.7) 134.5 (19.6) 114.9 Rail 38.2 Nil 38.2 31.0 Nil 31.0

Total continuing operations 149.5 (575.0) (425.5) 165.5 (19.6) 145.9 Group overheads (9.4) Nil (9.4) (10.8) Nil (10.8) Annual goodwill amortisation Nil (28.6) (28.6) Nil (41.7) (41.7) Redundancy/restructuring costs ^ Continuing operations (6.3) Nil (6.3) (6.6) Nil (6.6)

Total operating (loss)/profit of Group companies 133.8 (603.6) (469.8) 148.1 (61.3) 86.8

Share of operating profit/(loss) of joint ventures ^ Train operating companies 7.2 Nil 7.2 10.8 Nil 10.8 ^ thetrainline.com (4.3) Nil (4.3) (4.4) Nil (4.4) ^ other (0.3) Nil (0.3) (0.3) Nil (0.3) Goodwill amortised on investment in joint ventures Nil (8.7) (8.7) Nil (8.4) (8.4) Share of operating profit/(loss) of associates ^ Road King 10.5 Nil 10.5 12.9 Nil 12.9 ^ other (0.5) Nil (0.5) (0.5) Nil (0.5) Goodwill amortised on investment in associates Nil (0.3) (0.3) Nil (0.4) (0.4)

Total operating (loss)/profit: Group and share of joint ventures and associates 146.4 (612.6) (466.2) 166.6 (70.1) 96.5

Operating profit of »30.3m (2002 ^ »33.4m) for the continuing Overseas Bus segment includes amounts of »19.1m (2002 ^ »25.2m) in relation to Citybus, which was disposed of after 30 April 2003.

Goodwill amortisation of »28.6m (2002 ^ »41.7m) is analysed as UK Bus »0.8m (2002 ^ »0.7m), Overseas Bus »8.6m (2002 ^ »9.2m) and Coach USA »19.2m (2002 ^ »31.8m).

Restructuring costs of »6.3m (2002 ^ »6.6m) are analysed as UK Bus »1.8m (2002 ^ »1.5m), Overseas Bus »0.1m (2002 ^ »Nil), Coach USA »3.0m (2002 ^ »4.9m), Rail »0.6m (2002 ^ »Nil) and costs incurred centrally »0.8m (2002 ^ »0.2m)

The above segmental analysis of operating profit has been restated by applying certain costs that were previously classified within ‘‘Group overheads’’ against the operating profits of particular operating divisions. This has been done to align the segmental analysis with the way management now monitors the business and to achieve greater comparability with other companies.

For completeness, we have also presented on page 47, operating profits segmented using the previous basis.

46 Notes to the accounts 2003

Note 2 Segmental analysis (continued)

(b) (ii) Operating (loss)/profit 2003 2002 Performance Goodwill Results for Performance Goodwill Results for pre goodwill and the year pre goodwill and the year and exceptional and exceptional exceptionals items exceptionals items »m »m »m »m »m »m

Continuing operations UK Bus 76.0 Nil 76.0 71.1 Nil 71.1 Overseas Bus 30.3 Nil 30.3 34.1 Nil 34.1 Coach USA 16.6 (575.0) (558.4) 41.2 (19.6) 21.6

Total bus continuing operations 122.9 (575.0) (452.1) 146.4 (19.6) 126.8 Rail 38.2 Nil 38.2 31.3 Nil 31.3

Total continuing operations 161.1 (575.0) (413.9) 177.7 (19.6) 158.1 Group overheads (21.0) Nil (21.0) (23.0) Nil (23.0) Annual goodwill amortisation Nil (28.6) (28.6) Nil (41.7) (41.7) Redundancy/restructuring costs ^ Continuing operations (6.3) Nil (6.3) (6.6) Nil (6.6)

Total operating (loss)/profit of Group companies 133.8 (603.6) (469.8) 148.1 (61.3) 86.8

Share of operating profit/(loss) of joint ventures ^ Train operating companies 7.2 Nil 7.2 10.8 Nil 10.8 ^ thetrainline.com (4.3) Nil (4.3) (4.4) Nil (4.4) ^ other (0.3) Nil (0.3) (0.3) Nil (0.3) Goodwill amortised on investment in joint ventures Nil (8.7) (8.7) Nil (8.4) (8.4) Share of operating profit/(loss) of associates ^ Road King 10.5 Nil 10.5 12.9 Nil 12.9 ^ other (0.5) Nil (0.5) (0.5) Nil (0.5) Goodwill amortised on investment in associates Nil (0.3) (0.3) Nil (0.4) (0.4)

Total operating (loss)/profit: Group and share of joint ventures and associates 146.4 (612.6) (466.2) 166.6 (70.1) 96.5

(c) Operating costs 2003 2002 Performance Goodwill Results for Performance Goodwill Results for pre goodwill and the year pre goodwill and the year and exceptional and exceptional exceptionals items exceptionals items »m »m »m »m »m »m

Operating costs (excluding asset impairment) (1,752.6) (54.1) (1,806.7) (1,753.8) (51.6) (1,805.4) Impairment of assets of group companies Nil (549.5) (549.5) Nil (9.7) (9.7)

(1,752.6) (603.6) (2,356.2) (1,753.8) (61.3) (1,815.1)

47 Notes to the accounts 2003

Note 2 Segmental analysis (continued)

(d) Net assets 2003 2002 »m »m

UK Bus 298.5 344.3 Overseas Bus 230.1 271.0 Coach USA 323.2 1,032.3 Rail (76.8) (83.2) Central assets/liabilities (73.9) (67.5)

Net assets of Group companies before debt 701.1 1,496.9 Joint ventures 106.0 114.0 Associates 70.0 72.8

Total net assets before debt: Group, joint ventures and associates 877.1 1,683.7 Net debt (560.0) (774.6)

Net assets 317.1 909.1

Central assets/liabilities include the proposed dividend, token provisions, interest payable and receivable on Group debt and other net assets of the holding company.

Note 3 Other operating income 2003 2002 »m »m

Miscellaneous revenue 47.9 47.5 Liquidated damages received 8.5 Nil Losses on disposal of assets, other than properties (2.7) (0.1) Rail franchise support 34.0 6.8

87.7 54.2

Miscellaneous revenue comprises revenue incidental to the Group’s principal activity. It includes advertising income, maintenance income and property income.

The liquidated damages received of »8.5m (2002 ^ »Nil) relate to 24 new class 458 trains, which are now in service at South West Trains, a subsidiary of the Group. A number of problems were experienced with the late delivery and reliability of the new trains and the liquidated damages were received in respect of these issues.

Rail franchise support totalled »34.0m (2002 ^ »6.8m). The increase mainly reflects the deed of amendment agreed with the UK’s Strategic Rail Authority in respect of South West Trains and is offset by increased operating costs.

Note 4 Finance charges (net) 2003 2002 »m »m

Bank loans and overdrafts 27.8 35.3 Hire purchase and leases 4.7 7.6 Other loans 19.5 30.3 Interest receivable (5.4) (7.9) Net gain on early settlement of debt and other financial instruments (13.1) (5.5)

33.5 59.8

Interest receivable includes »Nil (2002 ^ »0.7m) in relation to share of joint venture net interest receivable and »1.0m (2002 ^ »1.0m) in relation to interest receivable on joint venture shareholder loan notes. Interest payable on other loans includes »0.2m (2002 ^ »Nil) in relation to share of joint venture net interest payable and »1.3m (2002 ^ »2.0m) in relation to share of associates’ net interest payable.

48 Notes to the accounts 2003

Note 5 (Loss)/profit on ordinary activities before taxation

(Loss)/profit on ordinary activities before taxation is stated after charging/(crediting): 2003 2002 »m »m

Materials and consumables 208.9 215.8 Depreciation and amounts written off ^ Tangible fixed assets (owned) 87.3 95.1 ^ Tangible fixed assets (on HP or lease) 18.0 17.6 ^ Impairment losses 162.7 9.7 Amortisation of goodwill ^ Subsidiaries 28.6 41.7 ^ Joint venture and associates 9.0 8.8 Impairment of Coach USA goodwill 386.8 Nil Losses/(gains) on property disposals 0.5 (0.5) Losses on other asset disposals 2.7 0.1 Operating lease rentals ^ PSVs and rolling stock 95.9 93.4 ^ Network Rail charges 101.5 103.4 ^ Land and buildings 10.1 10.2 Auditors’ remuneration ^ audit (Group) ^ Andersen Nil 0.3 ^ PricewaterhouseCoopers 0.7 0.5 Auditors’ remuneration ^ audit (Company) ^ PricewaterhouseCoopers ^^ Payments for non-audit services of »0.2m (2002 ^ »0.3m) were made to PricewaterhouseCoopers in the UK during the year. Payments for non-audit services of »0.4m were made to Andersen in year ended 30 April 2002 while auditors of the Company. The following items have been treated as exceptional: 2003 2002 »m »m

Provision for losses on operations to be terminated or sold at Coach USA (7.7) (9.9) Impairment of tangible fixed assets at Coach USA (162.7) (9.7) Write-down of current assets to net realisable value at Coach USA (17.8) Nil Impairment of goodwill at Coach USA (386.8) Nil Profit on disposal of overseas operations Nil 4.8 (Loss)/profit on sale of properties (0.5) 0.5

(575.5) (14.3) Tax effect of exceptional items Nil 5.6

(575.5) (8.7) Management undertook a review of its North American business, Coach USA, in the six months to 31 October 2002. The outcome of this review resulted in a significant change to the Group’s North American strategy, further details of which are given in the Chief Executive’s Review. As at 30 April 2002, the Group undertook an impairment review of Coach USA. The Directors concluded that at that time, no impairment write-down was required but announced that a review of Coach USA’s business would be undertaken. The recovery in revenues for the six months ended 31 October 2002 was less than expected and trading conditions in North America continued to be difficult. As a result of the change in strategy for Coach USA and the absence of a significant recovery in revenues, the Group undertook a further review of the carrying value of Coach USA’s assets as at 31 October 2002. The commercial assumptions used in reviewing the carrying value of Coach USA at that time are consistent with the current strategic plans for that business. The carrying values of current assets within Coach USA were also reviewed to ensure those were properly valued. Appropriate write-downs were recorded in the six months ended 31 October 2002. These write-downs included adjustments to the carrying value of taxicab inventory and receivables, where the realisable value had fallen reflecting market conditions at that time. The remaining goodwill and tangible fixed assets of Coach USA were reviewed for impairment. In accordance with FRS 11, ‘‘Impairment of fixed assets and goodwill’’, Coach USA was divided into appropriate ‘‘Income Generating Units’’ or ‘‘IGUs’’. The carrying value of each IGU as at 31 October 2002 was compared to its estimated recoverable amount, being the higher of its value in use and net realisable value to the Group. The value in use of each IGU was derived from discounted cash flow projections that covered the period to 30 April 2007. After 30 April 2007, the projections used a long-term growth rate compatible with projections for the US economy. The average discount rate used to arrive at the value in use was 13.0% on a pre-tax basis. The remaining tangible fixed assets and goodwill of each IGU are being amortised over their estimated useful economic lives, which in the case of goodwill is 16.25 years from 30 April 2003.

49 Notes to the accounts 2003

Note 5 (Loss)/profit on ordinary activities before taxation (continued)

The Group closed a number of businesses in the USA as a consequence of the review. Specific provision has been made for losses associated with the closure of these businesses over and above the write-down of asset values described above. These additional losses include employee redundancy payments, operating lease termination payments and professional fees directly attributable to the closures. To the extent the written-down values as at 31 October 2002 were based on projected cash flows, the actual cash flows for the six months ended 30 April 2003 have been compared to the projections. Actual cash flows were not significantly different to those projected.

The aggregate exceptional charges across all of the IGUs were as follows: Year ended 30 April 2003 »m

Provision for losses on operations to be terminated (7.7) Write-down of current assets to net realisable value (17.8) Impairment of tangible fixed assets (162.7) Impairment of goodwill (386.8)

(575.0)

The residual written down values of Coach USA’s net assets as at 30 April 2003 were as follows: As at 30 April 2003 »m

Goodwill 108.0 Tangible fixed assets 231.0 Net current liabilities (8.5)

Net assets before debt and tax balances 330.5

Net assets for Coach USA included in note 2(d) totalled »323.2m. This includes net tax liabilities of »7.3m excluded above. Details of disposals of fixed asset investments in the year are given in note 13.

Note 6 Staff costs and employees 2003 2002 »m »m

Staff costs Wages and salaries 788.8 774.6 Social security costs 60.6 61.3 Other pension costs (note 26d) 31.2 18.0 ESOP provided for 0.2 1.8

880.8 855.7

2003 2002 »m »m

Summary directors’ remuneration Aggregate emoluments 1.8 1.8 Compensation for loss of office 0.5 Nil Sums paid to third parties for directors’ services 0.2 0.1

2.5 1.9

Further information on directors’ remuneration, share options, incentive schemes and pensions is contained in the Remuneration report on pages 30 to 34. The average monthly number of persons employed by the Group during the year (including executive directors) was as follows: 2003 2002 number number

UK operations 21,292 20,856 UK administration and supervisory 1,945 1,884 Overseas 15,639 16,043

38,876 38,783

50 Notes to the accounts 2003

Note 7 Taxation on (loss)/profit on ordinary activities

(a) Analysis of charge in the year 2003 2002 Performance Goodwill and Results Performance Goodwill and Results pre goodwill exceptional for year pre goodwill exceptional for year and exceptionals items and exceptionals items »m »m »m »m »m »m

Current tax: UK corporation tax at 30% (2002 ^ 30%) 24.7 Nil 24.7 12.6 Nil 12.6 Share of joint ventures’ current tax 2.4 Nil 2.4 0.2 Nil 0.2 Share of associates’ current tax 0.3 Nil 0.3 3.1 Nil 3.1 Foreign tax (current year) 3.2 Nil 3.2 2.8 Nil 2.8 Foreign tax (adjustments in respect of prior periods) (3.6) Nil (3.6) (0.3) Nil (0.3)

Total current tax 27.0 Nil 27.0 18.4 Nil 18.4

Deferred tax: Origination and reversal of timing differences (0.2) (3.8) (4.0) 7.4 (9.2) (1.8) Adjustments in respect of prior periods 2.0 Nil 2.0 (1.6) Nil (1.6)

Total deferred tax 1.8 (3.8) (2.0) 5.8 (9.2) (3.4)

Tax on (loss)/profit on ordinary activities 28.8 (3.8) 25.0 24.2 (9.2) 15.0

(b) Factors affecting tax charge for the year 2003 2002 »m »m

(Loss)/profit on ordinary activities before tax (500.2) 42.0

(Loss)/profit on ordinary activities multiplied by standard rate of corporation tax in the UK of 30% (150.1) 12.6 Effects of: Goodwill amortisation 7.7 11.6 Impairment loss 172.5 Nil Non-deductible expenditure 4.4 0.7 Capital allowances for period in excess of depreciation (4.3) (7.1) Losses not utilised (2.1) 4.1 Movement in general provisions and other short term timing differences 5.6 2.8 Foreign taxes differences (3.1) (4.8) Adjustments to tax charge in respect of prior periods (3.6) (1.5)

Current tax charge for the year (note 7(a)) 27.0 18.4

(c) Factors that may affect future tax charges No provision has been made for deferred tax on rolled over gains. The total amount unprovided for is »3.3m (2002 ^ »3.3m). No deferred tax is recognised on the unremitted earnings of overseas subsidiaries, associates and joint ventures unless a binding agreement exists at the balance sheet date to remit such earnings in the future. Deferred tax assets in respect of corporation tax losses carried forward within UK companies are provided against where the recoverability is in doubt.

51 Notes to the accounts 2003

Note 8 Dividends 2003 2002 »m »m

Ordinary shares ^ interim paid (0.8 pence (2002 ^ 1.3 pence) per share) 10.6 17.1 ^ final proposed (1.8 pence (2002 ^ 1.3 pence) per share) 23.7 17.0

34.3 34.1

During the year, a share alternative was offered in respect of the interim dividend of 0.8 pence per share. The cash cost to the Company is unaffected but the cash is used by the Company’s registrars to acquire shares to be provided to shareholders as an alternative to the cash dividend. The alternative comprised ordinary shares with a market value of 36.13 pence per existing ordinary share. A similar arrangement applied to last year’s final dividend of 1.3 pence per share, the relevant market value being 22.00 pence per existing ordinary share.

Note 9 (Loss)/earnings per share

(Loss)/earnings per share have been calculated in accordance with FRS 14 ‘‘Earnings per Share’’ by calculating Group (loss)/profit on ordinary activities after tax, divided by the weighted average number of shares in issue during the year based on the following:

2003 2002 (Loss)/ Weighted (Loss)/ (Loss)/ Weighted (Loss)/ earnings average no. earnings earnings average no. earnings of shares per share of shares per share »m million pence »m million pence

Basic (525.2) 1,314.4 (40.0) 27.0 1,309.9 2.1

Adjusted (pre goodwill and exceptional items) 84.1 1,314.4 6.4 82.6 1,309.9 6.3 Dilutive shares ^ Executive Share Option Scheme ^ 2.3 Nil ^ 0.1 Nil ^ Employee SAYE Scheme ^ Nil Nil ^ 0.2 Nil

Diluted excluding goodwill and exceptional items 84.1 1,316.7 6.4 82.6 1,310.2 6.3 Include goodwill and exceptional items (55.6) ^ (4.2)

Diluted 27.0 1,310.2 2.1

(Loss)/earnings per share before goodwill and exceptional items is calculated after adding back goodwill amortisation and exceptional items after taking account of taxation, as shown on the consolidated profit and loss account on page 36. This has been presented to allow shareholders to gain a clearer understanding of the underlying performance. In accordance with FRS 14, share options are only treated as dilutive in the calculation of diluted earnings per share if their exercise would result in the issue of ordinary shares at less than fair value. Potential ordinary shares are only treated as dilutive where the effect is to reduce earnings per share or increase loss per share. Accordingly, the basic loss per share for 2003 has not been adjusted for the dilutive shares as the effect would be to reduce the loss per share.

52 Notes to the accounts 2003

Note 10 Profit and loss account

The movement on profit and loss account reserve is: Group Company 2003 2002 2003 2002 »m »m »m »m

Retained profit brought forward 514.8 128.7 670.1 342.4 Retained loss for the year (559.5) (7.1) (612.6) (72.3) Translation adjustment (26.6) (5.5) Nil Nil UK tax effect of translation adjustment (6.4) (4.8) Nil Nil Share of other recognised gains and losses of associates (0.1) (0.2) Nil Nil Goodwill previously written off to reserves 0.5 3.7 Nil Nil Transfer from share premium/other reserve Nil 400.0 Nil 400.0

Retained (loss)/profit carried forward (77.3) 514.8 57.5 670.1

Note 11 Intangible assets ^ goodwill

The Group movement in the year is: Joint ventures Associates Subsidiaries Total »m »m »m »m Cost Beginning of year 110.5 5.5 1,198.7 1,314.7 Additions Nil 0.5 2.8 3.3 Disposals Nil Nil (2.0) (2.0) Translation adjustment Nil Nil (100.2) (100.2) End of year 110.5 6.0 1,099.3 1,215.8 Amortisation Beginning of year (29.1) (4.3) (533.3) (566.7) Charge for the year (8.7) (0.3) (28.6) (37.6) Impairment losses Nil Nil (386.8) (386.8) Disposals Nil Nil 2.0 2.0 Translation adjustment Nil Nil 54.3 54.3 End of the year (37.8) (4.6) (892.4) (934.8) Net book value beginning of year 81.4 1.2 665.4 748.0 Net book value end of year 72.7 1.4 206.9 281.0

Goodwill arising during the year and the amortisation periods are as follows: Amortisation period Goodwill additions Years »m Subsidiaries North American acquisitions 20 1.5 UK Bus goodwill acquired 5 0.8 Adjustments re prior year acquisitions 20 0.5 Associates 10 0.5 3.3

53 Notes to the accounts 2003

Note 12 Tangible fixed assets

The following are included in the net book value of tangible fixed assets:

Group Company 2003 2002 2003 2002 »m »m »m »m

Land and buildings 160.6 176.9 3.4 3.4 PSVs and other assets 691.0 932.0 4.4 5.1

851.6 1,108.9 7.8 8.5

The Group movement in the year is: Land and PSVs and Total buildings other assets »m »m »m

Cost Beginning of year 185.0 1,558.2 1,743.2 Additions 19.5 51.6 71.1 New subsidiary undertakings Nil 2.0 2.0 Disposals (7.4) (53.0) (60.4) Sale/closure of subsidiary undertakings (2.9) (5.9) (8.8) Translation adjustment (6.7) (64.5) (71.2)

End of year 187.5 1,488.4 1,675.9

Depreciation Beginning of year (8.1) (626.2) (634.3) Charge (6.8) (98.5) (105.3) Impairment losses (17.2) (145.5) (162.7) Disposals 3.0 42.0 45.0 Sale/closure of subsidiary undertakings 0.5 3.2 3.7 Translation adjustment 1.7 27.6 29.3

End of year (26.9) (797.4) (824.3)

Net book value, beginning of year 176.9 932.0 1,108.9

Net book value, end of year 160.6 691.0 851.6

Included in the above are: Assets on hire purchase Nil 162.5 162.5 Leased PSV assets Nil 7.9 7.9 Short leasehold land and buildings 1.9 Nil 1.9 Long leasehold land and buildings 27.4 Nil 27.4

Heritable and freehold land amounting to »33.0m (2002 ^ »33.0m) has not been depreciated.

Depreciation of »18.0m (2002 ^ »17.6m) has been charged in the year in respect of assets held under hire purchase or finance lease agreements.

54 Notes to the accounts 2003

Note 12 Tangible fixed assets (continued)

The Company movement during the year was as follows: Land and PSVs and Total buildings other assets* »m »m »m Cost Beginning of year 3.6 6.4 10.0 Additions Nil 0.5 0.5 Disposals Nil (0.5) (0.5) End of year 3.6 6.4 10.0 Depreciation Beginning of year (0.2) (1.3) (1.5) Charge Nil (0.9) (0.9) Disposals Nil 0.2 0.2 End of year (0.2) (2.0) (2.2) Net book value, beginning of year 3.4 5.1 8.5 Net book value, end of year 3.4 4.4 7.8 * PSVs and other assets include »4.1m (2002 ^ »4.7m) of information technology in progress not yet allocated to Group operating companies.

Note 13 Fixed asset investments

The Group movement during the year was as follows: Joint ventures Associates Other Total investments »m »m »m »m Cost Beginning of year 159.8 158.7 3.7 322.2 Additions 0.3 1.0 0.1 1.4 Share of recognised profits 6.3 8.1 Nil 14.4 Share of other recognised gains and losses Nil (0.1) Nil (0.1) Translation adjustment Nil (6.2) Nil (6.2) Dividends received Nil (5.3) Nil (5.3) End of year 166.4 156.2 3.8 326.4 Amounts written off Beginning of year (29.1) (85.9) (0.5) (115.5) Amounts written off during year Nil Nil (0.6) (0.6) Goodwill amortised during year (8.7) (0.3) Nil (9.0) End of year (37.8) (86.2) (1.1) (125.1) Net book value, beginning of year 130.7 72.8 3.2 206.7 Net book value, end of year 128.6 70.0 2.7 201.3

The Group’s share of the net assets of joint venture companies included above is analysed below:

Virgin Rail Other joint 2003 2002 Group Holdings venture Total Total Limited companies »m »m »m »m Fixed assets 8.3 Nil 8.3 3.5 Current assets 158.5 0.7 159.2 133.2 Creditors: Amounts falling due within one year (114.3) (0.9) (115.2) (90.8) Creditors: Amounts falling due after more than one year (6.1) (0.7) (6.8) (6.6) Share of net assets/(liabilities) 46.4 (0.9) 45.5 39.3 Goodwill 71.9 0.8 72.7 81.4 Shareholder loan notes 10.0 0.4 10.4 10.0 128.3 0.3 128.6 130.7 In addition to amounts shown above, the Group has a share of net liabilities in thetrainline.com, as shown in note 21.

55 Notes to the accounts 2003

Note 13 Fixed asset investments (continued)

The principal associate is: Country of Number of Nominal value of % held at operation shares in issue share capital 30 April 2003 at 30 April 2003 in issue at 30 April 2003 Road King Infrastructure Limited China ^ ordinary shares 515.6m HK$51.6m 25.2 ^ preference shares 0.4m HK$0.04m 100.0

The market value of the Group’s ordinary share investment in Road King Infrastructure Limited, a Bermudan incorporated company, listed on the Hong Kong Stock Exchange, at 30 April 2003 was HK$480.2m (»38.5m) (2002 ^ HK$392.6m (»34.5m)). In February 2002, the Group converted 100,000 of its 518,380 7.5% HK$1,000 convertible preference shares in Road King Infrastructure Limited to ordinary shares. The remaining 418,380 preference shares were converted on 12 June 2003 which resulted in us having a 31.2% interest in Road King’s ordinary shares. The equivalent market value of the Group’s ordinary share investment in Road King post-conversion of the preference shares would be HK$661.1m (»53.0m). This calculation uses the market value of Road King’s shares at 30 April 2003 and the exchange rate prevailing at that date. The coupon received on the preference shares has been included in the share of associates’ operating profits. The Group’s share of operating profit is based on the most recent publicly available information, being the results for the year ended 31 December 2002. The carrying value of the Group’s interest in Road King Infrastructure Limited as at 30 April 2003 was »62.0m.

The principal joint ventures are: Country of Number of Nominal value of % held at incorporation/ shares in issue share capital 30 April 2003 operation at 30 April 2003 in issue at 30 April 2003 Virgin Rail Group Holdings Limited United Kingdom 34.8m »3.5m 49 Trainline Holdings Limited United Kingdom 3.4m »3.4m 49

Virgin Rail Group Holdings Limited is the holding company of Virgin Rail Group Limited, which in turn is the holding company of CrossCountry Trains Limited and West Coast Trains Limited. Trainline Holdings Limited is the holding company of thetrainline.com Limited. The Virgin Rail Group Holdings and Trainline Holdings shareholders’ agreements provide for joint decision making on key matters and equal representation on the Boards of both companies. As a consequence the investments have been accounted for as joint ventures. As part of the original acquisition, the Group acquired a »20m shareholder loan to Virgin Rail Group Limited, now a subsidiary of Virgin Rail Group Holdings Limited. The shareholder loan carries a 10% coupon and »10m was repaid on 28 April 2000. Virgin Rail Group Limited is restricted from paying dividends until any shareholders loans payable by it have been repaid. Under an agreement with the UK’s Strategic Rail Authority (‘‘SRA’’), Virgin Rail Group Limited, CrossCountry Trains Limited and West Coast Trains Limited may not pay dividends prior to 1 March 2004. As at 30 April 2002, the Group undertook an impairment review of its investment in Virgin Rail Group in accordance with FRS 11. The directors concluded, at that time, no impairment write-down was required. However, for each of the five years following the initial impairment review, the Group is required to review its initial projections in light of the actual cash flows. The Group has therefore reviewed the projections made in connection with the 30 April 2002 impairment review. This indicated that the actual net cash flows earned by the Group from its investment in Virgin Rail Group during the year ended 30 April 2003 were in line with those projected. Virgin Rail Group’s two train franchises are presently operating with subsidy from the SRA on the basis of a one-year budget set by the SRA. The value of the Group’s investment in Virgin Rail Group depends on the agreement of long-term commercial arrangements with the SRA for the operation of Virgin Rail Group’s two franchises. Virgin Rail Group has not yet agreed terms for the long-term operation of the franchises and it is not known with certainty when these arrangements will be agreed. In addition, Virgin Rail Group continues to be significantly impacted by the performance of Network Rail. Network Rail is contractually responsible for upgrading certain railway infrastructure, on which the future revenue growth of Virgin Rail Group’s train operations is dependent. The directors believe that these uncertainties give rise to a need to undertake a fresh impairment review as at 30 April 2003. In accordance with FRS 11, we have compared the carrying value of our net investment in Virgin Rail Group, with its estimated recoverable amount, being the higher of net realisable value and value in use. The Group has conducted this fresh review with reference to the terms agreed between Virgin Rail Group and the SRA on 19 July 2002 for the future operation of the two franchises. There remains uncertainty over the timing of agreeing new long-term commercial arrangements for each franchise and also around the level of shareholder return that will be achievable under such arrangements. The SRA has the right to offer the CrossCountry franchise for competitive tender and this presents a further uncertainty. However, to date, the SRA has not indicated that it intends to exercise this right. In conducting the impairment review as at 30 April 2003, the directors have made best estimates of future cash flows to the expected end of the two franchises in 2012 after taking account of these factors. Any estimation of value in use is subjective because it is based on estimates of future cash flows. Actual results can differ from those assumed and there can be no absolute assurance that the assumptions used will hold true.

56 Notes to the accounts 2003

Note 13 Fixed asset investments (continued) This review indicates that there is no impairment loss. The value in use of Virgin Rail Group was determined using an average pre-tax discount rate of 11.4%. However, the directors will keep this matter under review in the light of changing circumstances.

The remaining goodwill relating to the original acquisition of Virgin Rail Group is being amortised over its remaining useful life of 8.8 years from 30 April 2003.

The Company movement during the year was as follows: Subsidiary Joint Other Total undertakings ventures investments »m »m »m »m

Cost Beginning of year 235.5 139.4 0.8 375.7 Additions 1,359.0 Nil Nil 1,359.0 Disposals (213.1) (137.6) Nil (350.7) Translation gain (1.2) Nil Nil (1.2)

End of year 1,380.2 1.8 0.8 1,382.8

Amounts written off Beginning of year (1.8) Nil Nil (1.8) During the year (737.8) Nil Nil (737.8)

End of year (739.6) Nil Nil (739.6)

Net book value, beginning of year 233.7 139.4 0.8 373.9

Net book value, end of year 640.6 1.8 0.8 643.2

Subsidiary undertaking additions total »1,359.0m due to intercompany receivables being converted into investments and also increased investment in a subsidiary following the sale of certain of the Company’s investments and intercompany receivables to this subsidiary.

Acquisitions

During the year a further three acquisitions have been concluded by Coach USA for a total consideration of »2.8m in cash. The fair value of the net assets acquired was »1.3m giving rise to goodwill of »1.5m which has been capitalised and is being amortised over 20 years. UK businesses were acquired for a total consideration of »2.3m, paid in cash. The fair value of the net assets acquired was »2.3m giving rise to no goodwill.

These acquisitions are not considered to be individually or collectively material for the purposes of FRS 7, ‘‘Fair Values in Acquisition Accounting’’. The aggregate fair value of the assets acquired is as follows:

Coach USA UK Total Fair value to Group »m »m »m

Tangible fixed assets 1.8 0.2 2.0 Other current assets 0.1 2.1 2.2

Total assets 1.9 2.3 4.2

Creditors ^ within one year (0.6) Nil (0.6)

Total liabilities (0.6) Nil (0.6)

Net assets 1.3 2.3 3.6

Consideration 2.8 2.3 5.1

Goodwill 1.5 Nil 1.5

Disposal of subsidiary undertakings and businesses The Group disposed of and closed a number of businesses within Coach USA during the year. A provision of »7.7m for the losses on the operations to be sold or terminated was recorded as at 31 October 2002. (See note 21).

57 Notes to the accounts 2003

Note 13 Fixed asset investments (continued) The net assets disposed of were as follows: Coach Other Total USA Overseas »m »m »m

Tangible fixed assets 3.6 1.5 5.1 Other current assets 0.7 0.1 0.8

Net assets disposed 4.3 1.6 5.9 Provisions for losses on operations to be sold or terminated (7.7) Nil (7.7) Unutilised provision as at 30 April 2003 4.6 Nil 4.6 Closure costs 4.1 Nil 4.1 Goodwill previously written off to reserves Nil 0.5 0.5

Proceeds on disposal 5.3 2.1 7.4

Satisfied by: Cash 4.9 2.1 7.0 Deferred consideration 0.4 Nil 0.4

Net cash inflows in respect of the disposals comprised: Cash consideration 4.9 2.1 7.0 Cash at bank and in hand on disposal Nil Nil Nil

4.9 2.1 7.0

Note 14 Principal business units The principal subsidiary undertakings (ordinary shares 100% owned except where shown) are: Company Country of registration or incorporation Principal activity Stagecoach (South) Ltd* England Bus and coach operator Stagecoach (North West) Ltd* England Bus and coach operator East Midland Motor Services Ltd* England Bus and coach operator Stagecoach Scotland Ltd* Scotland Bus and coach operator National Transport Tokens Ltd (99.9%)* England Transport tokens East Kent Road Car Company Ltd* England Bus and coach operator Stagecoach West Ltd* England Bus and coach operator PSV Claims Bureau Ltd* England Claims handling Busways Travel Services Ltd* England Bus and coach operator South East London and Kent Bus Co Ltd* England Bus and coach operator East London Bus and Coach Co Ltd* England Bus and coach operator Cleveland Transit Ltd* England Bus and coach operator Cambus Ltd* England Bus and coach operator Stagecoach Devon Ltd* England Bus and coach operator Greater Manchester Buses South Ltd* England Bus and coach operator South West Trains Ltd England Train operating company Island Line Ltd* England Train operating company South Yorkshire Supertram Ltd* England Tram operator Wellington City Transport Ltd* New Zealand Bus and coach operator Transportation Auckland Corporation Limited* New Zealand Bus and coach operator Fullers Group Limited (96%)* New Zealand Ferry operator SGC (HK Group) Limited (formerly Citybus Group Limited)* Hong Kong Bus and coach operator Coach USA Inc.* United States Bus and coach operator

*indirectly held All companies operate in the countries shown above. The companies listed above include all those which principally affect the results and assets of the Group. A full list of subsidiary undertakings at 30 April 2003 will be annexed to the next annual return.

58 Notes to the accounts 2003

Note 15 Stocks Group Company 2003 2002 2003 2002 »m »m »m »m

Parts and consumables 19.1 19.1 Nil Nil Taxicabs held for resale 19.0 31.8 Nil Nil

38.1 50.9 Nil Nil

There is no material difference between the carrying value of stocks held at 30 April 2003 and their estimated replacement cost.

Note 16 Debtors and prepaid charges Amounts falling due within one year are: Group Company 2003 2002 2003 2002 »m »m »m »m

Trade debtors 91.0 107.7 0.3 0.2 Other debtors 30.3 36.2 13.7 13.0 Other prepayments and accrued income 62.6 73.2 1.2 0.9 VAT and other government debtors 8.4 11.4 6.3 8.2

192.3 228.5 21.5 22.3

Amounts falling due after more than one year are: Group Company 2003 2002 2003 2002 »m »m »m »m

Pension scheme prepayment (note 26d) 35.2 33.8 Nil 13.9 Amounts owed by group companies Nil Nil 550.6 1,643.0 Pre-contract costs 1.8 4.4 Nil Nil Other debtors 22.9 16.0 Nil Nil Deferred tax asset (note 21) Nil Nil 1.2 Nil

59.9 54.2 551.8 1,656.9

Note 17 Creditors

(a) Creditors: Amounts falling due within one year Group Company 2003 2002 2003 2002 »m »m »m »m

Bank overdrafts Nil Nil 59.6 17.7 Bank loans and loan notes 58.9 76.7 46.8 54.8 Trade creditors 95.5 110.3 0.9 1.2 Accruals and deferred income 230.3 242.8 42.3 52.5 Dividends payable 23.7 17.0 23.7 17.0 Other creditors ^ UK corporation tax payable 44.9 20.2 9.1 7.8 ^ Foreign tax payable 4.0 6.1 Nil Nil ^ PAYE and NIC payable 12.1 10.2 0.2 0.2 Current portion of hire purchase and lease obligations 34.8 40.7 Nil Nil Amounts due to group companies Nil Nil 28.0 26.0

504.2 524.0 210.6 177.2

59 Notes to the accounts 2003

Note 17 Creditors (continued)

(b) Creditors: Amounts falling due after more than one year Group Company 2003 2002 2003 2002 »m »m »m »m

Bank loans and loan notes 181.1 237.3 129.2 190.7 US Dollar 8.625% Notes (note 17c) 208.9 259.3 227.6 342.0 US Dollar 9.375% Notes (note 17d) Nil 0.1 Nil Nil Euro 6% Notes (note 17e) 195.2 244.7 195.2 244.7 Non-current portion of hire purchase and lease obligations 45.8 65.8 Nil Nil Deferred income 9.7 Nil Nil Nil Other creditors Nil 0.9 Nil Nil Amounts due to group companies Nil Nil 11.4 34.6

640.7 808.1 563.4 812.0

(c) US Dollar 8.625% Notes

On 9 November 1999 the Group issued US$500m of 8.625% Notes due in 2009. Interest on the Notes is payable six monthly in arrears. Unless previously redeemed or purchased and cancelled, the Notes will be redeemed at their principal amount on 15 November 2009.

During the year US$45.0m (2002 ^ US$71.5m) of the Notes were purchased by the Group. US$135.9m (2002 ^ Nil) of the Notes purchased have been cancelled. The cumulative par value of Notes repurchased was US$165.9m as at 30 April 2003 (2002 ^ US$120.9m).

The Notes were issued at 99.852% of their principal amount. The consolidated carrying value of the Notes at 30 April 2003 was »208.9m (2002 ^ »259.3m), after taking account of the notes purchased by the Group, the discount on issue, and issue costs.

(d) US Dollar 9.375% Notes

In June 1997, Coach USA, Inc. issued $150m 9.375% senior subordinated notes due in 2007. Following the acquisition of Coach USA, Inc. by the Group in July 1999 a tender offer for all the outstanding notes was made at a price of 101% of principal. $0.2m of notes were tendered and redeemed at this time. On 18 November 1999 a tender and consent offer was made for all the outstanding notes. On 17 December 1999 $146.4m of notes were tendered and redeemed. Following the tender the terms of the notes were amended to remove amongst other clauses, restrictive covenants and events of default. $0.1m of these notes remain outstanding.

The remaining notes were redeemed at the option of the Company at a premium of 104.7% on 1 July 2002.

(e) Euro 6% Notes

On 24 November 1999 the Group issued e400m of 6% Notes due in 2004. Interest on the Notes is payable annually in arrears. Unless previously redeemed or purchased and cancelled, the Notes will be redeemed at their principal amount on 24 November 2004.

During the year e48.6m (2002 ^ e42.6m) of the Notes were purchased by the Group and cancelled. The cumulative par value of Notes repurchased and cancelled was e99.2m as at 30 April 2003 (2002 ^ e50.6m).

The Notes were issued at 99.937% of their principal amount. The Group has effectively swapped the carrying value into US Dollars and Sterling with a currency swap. After taking account of the notes repurchased and cancelled, the discount on issue, issue costs and the currency swap, the carrying value of the Notes at 30 April 2003 was »195.2m (2002 ^ »244.7m).

60 Notes to the accounts 2003

Note 17 Creditors (continued)

(f) Borrowings are repayable as follows Group Company 2003 2002 2003 2002 »m »m »m »m

On demand or within 1 year Bank overdraft Nil Nil 59.6 17.7 Bank loans and loan notes 58.9 76.7 46.8 54.8 Hire purchase and lease obligations 34.8 40.7 Nil Nil Within 1-2 years Bank loans and loan notes 130.6 25.2 118.3 8.0 Euro 6% Notes 195.2 Nil 195.2 Nil Hire purchase and lease obligations 23.3 32.8 Nil Nil Within 2-5 years Bank loans and loan notes 49.5 207.4 10.9 182.7 Euro 6% Notes Nil 244.7 Nil 244.7 US Dollar 9.375% Notes Nil Nil Nil Nil Hire purchase and lease obligations 22.2 32.0 Nil Nil Over 5 years Bank loans and loan notes 1.0 4.7 Nil Nil US Dollar 8.625% Notes 208.9 259.3 227.6 342.0 US Dollar 9.375% Notes Nil 0.1 Nil Nil Hire purchase and lease obligations 0.3 1.0 Nil Nil

Total borrowings 724.7 924.6 658.4 849.9 Less current maturities (93.7) (117.4) (106.4) (72.5)

Long term portion of borrowings 631.0 807.2 552.0 777.4

Interest terms on UK borrowings (except loan notes) are at annual rates between 0.4% and 1.625% over Bank of Scotland base rate or equivalent LIBOR rates. Interest terms on overseas borrowings are at annual rates between 1.9% and 8.4% and are based on applicable local market borrowing rates. Interest on loan notes are at three months LIBOR or fixed interest. Loan notes amounting to »39.5m (2002 ^ »46.8m) are backed by guarantees provided under group banking facilities. The loan notes have been classified by reference to the earliest date on which the loan note holders can request redemptions. UK Bank loans, overdrafts, Euro Notes and US$ Notes are unsecured.

Note 18 Derivatives and other financial instruments

Treasury policy and the use of financial instruments are both discussed in the Finance Director’s review on pages 19 to 21. Short term debtors and creditors have been excluded from the disclosures below except for 18(c) on currency exposures.

(a) Interest rate and currency profile of financial liabilities The interest rate profile of the financial liabilities of the Group on which interest is paid at 30 April 2003 was as follows:

Floating rate Fixed rate Total Weighted average Weighted average fixed interest period for which rate rate is fixed Currency »m »m »m % Years

Sterling 255.2 Nil 255.2 n/a n/a US Dollar 167.2 245.7 412.9 7.7 1.5 Hong Kong Dollar 49.4 Nil 49.4 n/a n/a New Zealand and Australian Dollar 0.7 Nil 0.7 n/a n/a Other 6.5 Nil 6.5 n/a n/a

Gross Borrowings 479.0 245.7 724.7 7.7 1.5

The figures shown in the above table take into account various interest rate and currency swaps used to manage the interest rate and currency profile of borrowings.

61 Notes to the accounts 2003

Note 18 Derivatives and other financial instruments (continued)

As at 30 April 2003 floating rate Sterling borrowings of »50m (2002 ^ »125m) were hedged with a collar with an average cap rate of 8.5% and an average floor of 4.5%. The cap was not exercised during the year to 30 April 2003, the floor was exercised on »50m at an average rate of 4.5%. The floating rate financial liabilities bear interest at rates fixed in advance for periods ranging from one to three months based on market rates outlined in note 17. Financial liabilities on which no interest is paid comprise certain provisions totalling »106.6m (2002 ^ »91.6m). These are denominated in Sterling »54.1m (2002 ^ »49.9m), US dollars »46.8m (2002 ^ »36.1m) and Hong Kong dollars »5.7m (2002 ^ »5.6m). The weighted average maturity of these liabilities is 1.9 years (2002 ^ 2.1 years). The Group’s policies on managing interest rate risk and currency risk are explained in the Finance Director’s review on pages 19 to 21. The interest rate profile of the financial liabilities of the Group on which interest is paid at 30 April 2002 was as follows:

Floating rate Fixed rate Total Weighted average Weighted average fixed interest period for which rate rate is fixed Currency »m »m »m % Years

Sterling 169.0 9.6 178.6 7.6 0.5 US Dollar 353.1 318.8 671.9 7.3 2.2 Hong Kong Dollar 58.2 Nil 58.2 n/a n/a New Zealand and Australian Dollar 1.9 0.9 2.8 5.8 1.3 Other 13.1 Nil 13.1 n/a n/a

Gross borrowings 595.3 329.3 924.6 7.3 2.2

The maturity profile of the Group’s financial liabilities at 30 April 2003 was as follows: 2003 2002 »m »m

Expiring within one year 136.8 155.7 Expiring in more than one year but less than two years 371.0 76.9 Expiring in more than two years but less than five years 88.4 516.0 Expiring beyond five years 235.1 267.6

831.3 1,016.2

Represented by: Gross borrowings 724.7 924.6 Financial liabilities on which no interest is paid ^ insurance provisions 80.2 65.2 ^ token provisions 26.4 25.5 ^ other creditors Nil 0.9

831.3 1,016.2

(b) Interest rate and currency profile of financial assets The Group’s financial assets on which floating interest is receivable comprise cash deposits and cash in hand of »164.7m (2002 ^ »150.0m). The cash deposits comprise deposits placed on money market at call, seven day and monthly rates. The currency analysis is as follows: Floating rate 2003 2002 Currency »m »m

Sterling 98.0 119.1 US Dollar 58.7 20.8 Hong Kong Dollar 5.0 4.6 New Zealand and Australian Dollar 2.3 2.0 Other 0.7 3.5

Cash at bank and in hand 164.7 150.0

62 Notes to the accounts 2003

Note 18 Derivatives and other financial instruments (continued)

Financial assets on which no interest is receivable total »4.2m (2002 ^ »4.7m) and comprise other investments of »2.7m (2002 ^ »3.2m) and other debtors greater than one year of »1.5m (2002 ^ »1.5m). These assets are denominated in Sterling »0.9m (2002 ^ »1.1m), US dollars »1.2m (2002 ^ »1.7m) and others »2.1m (2002 ^ »1.9m). The weighted average period to maturity of other debtors greater than one year is 1.5 years (2002 ^ 1.5 years). Financial assets on which fixed interest is receivable total »6.5m (2002 ^ »21.5m) and comprise US$ denominated loan notes receivable. They have a weighted average interest rate of 13.0% (2002 ^ 12.9%) and an average maturity of 2.7 years (2002 ^ 2.5 years).

(c) Currency exposures

As explained in the Finance Director’s review on pages 19 to 21, the Group’s objective in managing currency borrowings and net exposures arising from its investments in net assets of overseas subsidiaries is to maintain a low cost of borrowing and to retain some potential for currency related appreciation whilst partially hedging against currency depreciation. All foreign currency borrowings are taken out to provide for or to hedge against foreign net investments. Gains and losses arising from these currency borrowings and net exposures are recognised in the statement of total recognised gains and losses.

The Group generally hedges actual and forecast foreign exchange transactional exposures up to one year forward. At 30 April 2003 and 30 April 2002 there were no material net transactional exposures.

(d) Borrowing facilities

At 30 April 2003 the Group had the following undrawn committed banking and hire purchase facilities:

2003 2002 »m »m

Expiring within one year 59.2 28.9 Expiring in more than one year but no more than two years 207.9 Nil Expiring beyond two years 44.4 282.6

311.5 311.5

Note 19 Fair values

Set out below is a comparison of fair and book values of all the Group’s financial instruments by category. Where available, market values have been used to determine fair values. Where market values are not available, fair values have been calculated by discounting future cash flows at prevailing interest and exchange rates.

2003 2002 Book value Fair value Book value Fair value »m »m »m »m

Other financial assets 10.7 10.7 26.2 26.2 Primary financial instruments to finance the Group’s operation Cash deposits and bank overdrafts 164.7 164.7 150.0 150.0 US Dollar 8.625% Notes (208.9) (216.4) (259.3) (247.2) Euro 6% Notes (210.4) (210.0) (215.8) (203.1) Foreign currency swaps hedging currency debt 15.2 25.4 (28.9) (25.6) Short term borrowings and current portion of long term debt (93.7) (93.7) (117.4) (117.4) Other long term borrowings (226.9) (226.9) (303.2) (303.2) Derivative financial instruments held to manage the interest rate, currency and commodity risk profiles Interest rate swaps and similar instruments Nil 15.5 Nil (0.2) Forward foreign currency contracts and swaps hedging overseas investments 0.7 (0.9) (5.3) (5.9) Fuel price swaps and options Nil 1.4 Nil 1.5 Other financial liabilities (106.6) (106.6) (91.6) (91.6)

63 Notes to the accounts 2003

Note 20 Hedge accounting 2003 2002 Gains Losses Total Gains Losses Total »m »m »m »m »m »m

Unrecognised gains or losses on hedges at start of year 35.5 (31.5) 4.0 26.5 (81.0) (54.5) Gains or losses arising in previous years that were recognised in the year 22.3 0.3 22.6 7.6 55.4 63.0

Gains or losses arising in previous years that were not recognised in the year 57.8 (31.2) 26.6 34.1 (25.6) 8.5 Gains or losses arising in the year that were not recognised in the year 1.2 (2.3) (1.1) 1.4 (5.9) (4.5)

Unrecognised gains or losses on hedges at end of year 59.0 (33.5) 25.5 35.5 (31.5) 4.0

Of which: Gains or losses expected to be recognised within one year 19.4 (16.9) 2.5 11.1 (13.5) (2.4) Gains or losses expected to be recognised after one year 39.6 (16.6) 23.0 24.4 (18.0) 6.4

59.0 (33.5) 25.5 35.5 (31.5) 4.0

As explained in the Finance Director’s review on pages 19 to 21, the Group’s policy is to hedge against interest rate risk, currency risk and commodity price risk. Gains and losses on instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised.

Note 21 Provisions for liabilities and charges Group Company 2003 2002 2003 2002 »m »m »m »m

Deferred taxation 104.8 105.3 Nil 3.6 Token redemption provision 26.4 25.5 Nil Nil Insurance provisions 80.2 65.2 Nil Nil Environmental provisions 2.4 2.9 0.8 1.2 Pension provision (note 26d) 11.8 6.1 2.8 3.2 Restructuring provision 4.6 1.7 Nil Nil

230.2 206.7 3.6 8.0

Joint ventures ^ share of gross assets (5.3) (5.1) Nil Nil ^ share of gross liabilities 27.9 21.8 Nil Nil

22.6 16.7 Nil Nil

Total provisions 252.8 223.4 3.6 8.0

The token redemption provision relates to tokens issued to third parties to be redeemed as payment for transportation services. The insurance provisions relate to insurance reserves on incurred accidents up to 30 April in each year where claims have not been settled. These are based on actuarial reviews and prior claims history. The environmental provisions relate to legal or constructive obligations to undertake environmental work, such as an obligation to rectify land which has been contaminated by fuel tanks or to eliminate the presence of asbestos. The provision is based on the estimated cost of undertaking the work required. The pension provision relates to unfunded liabilities established by actuarial review and SSAP 24 pension liabilities. The restructuring provision relates to the estimated costs of completing the sale or closure of operations at Coach USA, where an obligation exists at the balance sheet date. Share of joint venture’s net liabilities relates to the Group’s interest in the consolidated net liabilities of Trainline Holdings Limited.

64 Notes to the accounts 2003

Note 21 Provisions for liabilities and charges (continued)

The Group movement during the year was as follows:

Deferred Token Insurance Environmental Pension Restructuring Share of taxation redemption provisions provisions provisions provision joint venture’s provision net liabilities »m »m »m »m »m »m »m

Beginning of year 105.3 25.5 65.2 2.9 6.1 1.7 16.7 ^ (credited)/provided during year (2.0) Nil 38.4 0.2 12.8 7.7 5.9 ^ less deferred tax charge in profit and loss account re associates/joint ventures 0.3 Nil Nil Nil Nil Nil Nil Utilised in the year Nil Nil (19.4) (0.7) (7.1) (4.6) Nil Arising on sale of tokens during year Nil 13.2 Nil Nil Nil Nil Nil Redemption of tokens Nil (12.3) Nil Nil Nil Nil Nil Translation differences 1.2 Nil (4.0) Nil Nil (0.2) Nil

End of year 104.8 26.4 80.2 2.4 11.8 4.6 22.6

The Company movement during the year was as follows: Deferred Environmental Pension taxation provisions provisions »m »m »m

Beginning of year 3.6 1.2 3.2 (Credited)/provided during year (4.8) Nil 0.5 Payments in year Nil (0.4) (0.9)

End of year (1.2) 0.8 2.8

Deferred taxation is calculated as follows: Group Company 2003 2002 2003 2002 »m »m »m »m

Accelerated capital allowances 193.6 198.2 0.5 0.9 Pension timing differences 7.0 8.4 (0.8) 3.1 Timing differences related to overseas retained earnings Nil 0.1 Nil Nil Short term timing differences (95.8) (101.4) (0.9) (0.4)

104.8 105.3 (1.2) 3.6

Note 22 Equity share capital 2003 2002 »m »m

Authorised 1,840,000,000 (2002 ^ 1,840,000,000) ordinary shares of 0.5p each 9.2 9.2

Allotted, called-up and fully-paid 1,320,946,012 (2002 ^ 1,320,946,012) ordinary shares of 0.5p each 6.6 6.6

There were no movements in issued share capital during the year ended 30 April 2003. In October 1999 the Company established a Qualifying Employee Share Ownership Trust (‘‘QUEST’’) for the purpose of satisfying share option schemes for staff. During the year to 30 April 2000 a contribution of »10.5m and a loan of »10.0m were made to the QUEST and used by the QUEST to apply for 11,500,000 new ordinary shares of 0.5p each at the market price of »1.78 per share on 29 October 1999. Under the provisions of FRS 5 ‘‘Reporting the Substance of Transactions’’, the assets and liabilities of the QUEST are recognised as assets and liabilities of the Group and the QUEST is consolidated in the Group accounts. Balances and transactions between the QUEST and other Group entities are eliminated on consolidation. Since the shares have not been issued outside of the Group, the only effect of the above transaction was to increase share capital by »0.1m. The 11,500,000 shares are to be used to satisfy the valid exercise of options granted under the Stagecoach savings related share option schemes. Between 29 October 1999 and 30 April 2002 1,769,336 shares were transferred to option holders. During the year to 30 April 2003, a further 4,829,012 shares were transferred to option holders. The remaining 4,901,652 shares are held by the QUEST. At 30 April 2003 the market valuation of shares held was »2.2m.

65 Notes to the accounts 2003

Note 23 Share option schemes

(a) Savings related share option schemes

The Company has two Inland Revenue approved savings related share option schemes. The schemes are based on eligible employees being granted options and them agreeing to open a sharesave account with the Nationwide Building Society and/or Halifax plc and to save weekly or monthly for a fixed period. The right to exercise the option is at the employee’s discretion within six months following the end of the fixed period.

Scheme Date of issue Exercise price Duration

B 1 April 1998 129.1p 5 years C 1 April 2002 60.0p 3 years

The changes in the number of participating employees and options over ordinary shares were as follows:

Scheme B Scheme C Number of Ordinary Number of Ordinary employees shares employees shares

Beginning of year 1,725 3,847,359 4,414 15,654,052 Options lapsed 1,263 2,530,468 834 3,300,599

End of year 462 1,316,891 3,580 12,353,453

(b) Executive share options

Award date Number of At 1 May Granted Lapsed At 30 April Exercise Date from Expiry date executives 2002 2003 price » which & directors exercisable

9 September 1994 1 53,296 Nil Nil 53,296 0.3030 9 September 1997 9 September 2004 13 October 1995 3 339,353 Nil Nil 339,353 0.4820 13 October 1998 13 October 2005 11 October 1996 9 1,332,276 Nil Nil 1,332,276 1.0900 11 October 1999 11 October 2006 8 September 1997 9 558,569 Nil Nil 558,569 1.2810 8 September 2000 8 September 2004 8 September 1997 2 41,472 Nil Nil 41,472 1.2810 8 September 2000 8 September 2007 8 September 1997 3 725,754 Nil Nil 725,754 1.2810 8 September 2002 8 September 2004 19 October 1998 21 392,506 Nil 63,753 328,753 2.2280 19 October 2001 19 October 2005 19 October 1998 3 738,874 Nil Nil 738,874 2.2280 19 October 2003 19 October 2005 1 February 1999 1 27,130 Nil Nil 27,130 2.5060 1 February 2002 1 February 2006 16 June 1999 3 145,755 Nil Nil 145,755 2.1140 16 June 2004 16 June 2006 19 July 1999 26 672,557 Nil 33,797 638,760 2.0310 19 July 2002 19 July 2006 1 October 1999 1 78,050 Nil Nil 78,050 0.0050 1 October 2002 1 October 2006 15 June 2000 72 7,402,661 Nil 692,497 6,710,164 0.6250 15 June 2003 15 June 2007 15 June 2000 2 1,822,301 Nil Nil 1,822,301 0.6250 15 June 2005 15 June 2007 20 June 2001 77 6,752,925 Nil 286,850 6,466,075 0.7075 20 June 2004 20 June 2008 23 July 2001 1 828,300 Nil 828,300 Nil 0.7625 23 July 2004 23 July 2008 23 July 2002 99 Nil 22,497,813 200,000 22,297,813 0.3750 23 July 2005 23 July 2009 5 December 2002 39 Nil 15,835,032 Nil 15,835,032 0.2700 5 December 2005 5 December 2009

Totals 21,911,779 38,332,845 2,105,197 58,139,427

The expiry dates shown above are based on the original share option agreements. As explained in the Remuneration report on pages 30 to 34, certain former directors of the Company hold share options where the expiry date is earlier than the original expiry date due to the directors no longer being employed by the Group.

All options were granted for nil consideration. The mid-market price for these shares at 30 April 2003 was »0.44. The Company’s shares traded in the range »0.125 to »0.805 during the year to that date.

66 Notes to the accounts 2003

Note 24 Reserves

Group Company 2003 2002 2003 2002 »m »m »m »m

Profit and loss account (note 10) (77.3) 514.8 57.5 670.1 Share premium account 386.1 384.4 386.1 384.4 ESOP distribution reserve Nil 1.6 Nil 1.6 Capital redemption reserve 1.7 1.7 1.7 1.7

Other than the Company’s profit and loss account balance of »57.5m, none of the above reserves as at 30 April 2003 are regarded as distributable.

(Loss)/profit for the financial year comprises: 2003 2002 »m »m

Company (578.3) (38.1) Subsidiary undertakings, joint ventures and associates 53.1 65.1

(525.2) 27.0

The movement in the profit and loss account is given in note 10. The movement on other reserves is as follows:

Group and Group and Group and company: company: company: share ESOP capital premium distribution redemption reserve reserve »m »m »m

Beginning of year 384.4 1.6 1.7 Arising on shares issued by QUEST 1.7 Nil Nil ESOP distributed during year Nil (1.8) Nil ESOP provided during year Nil 0.2 Nil

End of year 386.1 Nil 1.7

The ESOP distribution reserve represents the amount to be subscribed in connection with the approved profit sharing scheme (following an equivalent contribution by Group companies) in respect of the issue of new shares to eligible employees.

Cumulative goodwill of »113.8m (2002 ^ »114.3m) has been written off against reserves in periods prior to the adoption of FRS 10 ‘‘Goodwill and Intangible Assets’’.

67 Notes to the accounts 2003

Note 25 Consolidated cash flows

(a) Reconciliation of operating (loss)/profit to net cash flow from operating activities 2003 2002 »m »m

Operating (loss)/profit of Group companies (469.8) 86.8 Depreciation 105.3 112.7 Impairment of tangible fixed assets at Coach USA 162.7 9.7 Impairment of goodwill at Coach USA 386.8 Nil Loss on sale of tangible fixed assets, other than properties 2.7 0.1 Goodwill amortisation 28.6 41.7 Provision for losses on operations to be terminated or sold 7.7 9.9 Decrease/(increase) in stocks 11.7 (3.1) Decrease/(increase) in debtors 13.6 (6.6) ESOP provided for 0.2 1.8 Decrease in creditors (1.7) (4.1) Increase in provisions 24.4 8.0

Net cash inflow from operating activities 272.2 256.9

(b) Reconciliation of net cash flow to movement in net debt 2003 2002 »m »m

(Decrease)/increase in cash (12.7) 28.5 Bond repayments 40.0 77.7 Cash flow from decrease/(increase) in debt and lease financing 95.3 (17.3)

122.6 88.9 Loans and finance leases of acquired/disposed subsidiaries Nil 0.5 Other movements 59.9 (40.1) Movement in cash collateral 32.1 (38.2)

Decrease in net debt 214.6 11.1 Opening net debt (774.6) (785.7)

Closing net debt (560.0) (774.6)

(c) Analysis of net debt

Opening Cash flows Cash Other Closing collateral movements »m »m »m »m »m

Cash 107.5 (12.7) Nil (4.7) 90.1 Cash collateral 42.5 38.9 (6.8) Nil 74.6 Hire purchase and lease obligations (106.5) 44.4 Nil (18.5) (80.6) Bank loans and loan stock (314.0) 44.1 6.8 23.1 (240.0) Bonds (504.1) 40.0 Nil 60.0 (404.1)

Totals (774.6) 154.7 Nil 59.9 (560.0)

The net total of cash and cash collateral of »164.7m (2002 ^ »150.0m) is classified in the balance sheet as »164.7m (2002 ^ »150.0m) in cash at bank and in hand.

(d) Restricted cash

The cash collateral balance as at 30 April 2003 of »74.6m (2002 ^ »42.5m) comprises balances held in trust in respect of loan notes of »34.3m (2002 ^ »41.1m) and Coach USA letter of credit cash and insurance collateral cash of »40.3m (2002 ^ »1.4m). In addition, cash includes train operating company cash of »42.9m (2002 ^ »56.4m). Under the terms of the franchise agreements, train operating companies can only distribute cash out of retained profits.

68 Notes to the accounts 2003

Note 25 Consolidated cash flows (continued)

(e) Purchase of subsidiary undertakings Coach USA UK Total »m »m »m

Net assets acquired at fair value (see note 13) 1.3 2.3 3.6 Goodwill 1.5 Nil 1.5

2.8 2.3 5.1

Consideration Cash and acquisition expenses paid in year 2.8 Nil 2.8 Deferred consideration Nil 2.3 2.3

2.8 2.3 5.1

The cash paid during the year in respect of the purchase of subsidiary undertakings was as follows: »m

Cash paid in respect of acquisitions in year (see above) 2.8 Deferred consideration in respect of Coach USA acquisitions 7.3

10.1

Companies acquired in the year did not have a material impact on cash flows.

(f) Disposal of subsidiaries and other businesses

Details of net assets disposed of and the related sales proceeds are set out in note 13.

Companies disposed of in the year did not have a material impact on cash flows.

Note 26 Guarantees and other financial commitments

(a) Guarantees

The Company is a party to bank guarantees in respect of guarantees, loans, overdrafts and other facilities provided to certain Group undertakings of which »81.0m was outstanding at 30 April 2003 (2002 ^ »75.7m) and provides cross-guarantees to certain subsidiary undertakings under VAT group provisions.

(b) Capital commitments

Capital commitments are as follows: Group Company 2003 2002 2003 2002 »m »m »m »m

Contracted for but not provided For delivery in one year 50.5 73.1 16.8 11.8

At 30 April 2003, »32.6m of the total capital commitments relates to overseas operations (30 April 2002 ^ »55.6m).

69 Notes to the accounts 2003

Note 26 Guarantees and other financial commitments (continued)

(c) Operating lease and similar commitments

The annual commitments due under non-cancellable operating leases are as follows: 2003 2002 »m »m

Under one year 80.3 77.9 Between one year and five years 152.4 134.0 Five years and over 3.3 74.4

South West Trains Limited has contracts with Network Rail for access to the railway infrastructure (track, stations and depots) for the period until February 2007. South West Trains Limited also has contracts which commit it to lease rolling stock from Angel Trains Contracts Ltd, HSBC Rail (UK) Ltd and Porterbrook Leasing Limited.

(d) Pension commitments

(i) Summary of schemes operated The Group contributes to a number of pension schemes. The principal defined benefit occupational benefit schemes are as follows:

* The South West Trains section of the Railways Pension Scheme (‘‘RPS’’); * The Island Line section of the Railways Pension Scheme (‘‘RPS’’); * The Stagecoach Group Pension Scheme (‘‘SGPS’’); * A number of UK Local Government Pension Schemes (‘‘LGPS’’).

These defined benefit schemes cover the majority of the Group’s UK employees. These schemes are devised in accordance with local employment terms and conditions. Each scheme is administered independently of the employers and the scheme assets are held in trusts that are managed by investment managers appointed by the schemes’ trustees.

In addition, the Group contributes to a number of defined contribution schemes covering non-UK employees.

(ii) Accounting for pensions under SSAP 24 The Group has applied SSAP24, ‘‘Accounting for pension costs’’ in preparing its accounts. The total pension cost reported in the profit and loss account and the cash outflow to the Group in the year ended 30 April 2003 can be analysed as follows:

Pension cost Cash outflow 2003 2002 2003 2002 »m »m »m »m

UK Bus/Group overheads ^ SGPS 14.0 12.4 15.5 15.0 ^ LGPS 2.7 1.9 3.0 2.4 ^ Other 0.8 0.2 0.9 Nil Rail ^ RPS 12.1 1.8 5.9 0.4 Coach USA 1.6 1.7 1.6 1.7

31.2 18.0 26.9 19.5

The balance sheet position of each scheme as at 30 April 2003 is analysed below. It should be noted that the balance sheet position under SSAP 24 that is shown on page 71 is not equivalent to an actuarial estimate of the scheme’s funding position at the balance sheet date. The net balance sheet asset of »23.4m (2002 ^ »27.7m) shown below is the sum of the cumulative differences between contributions paid by the employers into the schemes and the charge to the profit and loss account.

70 Notes to the accounts 2003

Note 26 Guarantees and other financial commitments (continued)

(d) Pension commitments (continued) Prepayment Provision Net 2003 2002 2003 2002 2003 2002

UK Bus/Group overheads ^ SGPS 20.3 18.8 Nil Nil 20.3 18.8 ^ LGPS 14.9 15.0 (0.2) (0.6) 14.7 14.4 ^ Other Nil Nil (3.3) (3.4) (3.3) (3.4) Rail ^ RPS Nil Nil (8.3) (2.1) (8.3) (2.1)

35.2 33.8 (11.8) (6.1) 23.4 27.7

The accounting for each of the defined benefit schemes is based on the most recent formal valuation of the relevant scheme, updated where appropriate to the financial year-end immediately following the date of the valuation. The key details for each scheme are as follows:

Most recent Latest actuarial Funding Market full actuarial review for Level value of valuation of SSAP 24 accounting % assets scheme purposes »m

UK Bus/Group overheads ^ SGPS 5 April 2002 30 April 2002 105 325.9 ^ LGPS 31 March 2001 30 April 2001 121 186.6 Rail ^ RPS 31 December 2001 31 December 2001 105 225.5

The above defined benefit schemes are funded at contribution rates determined by independent actuaries on the basis of triennial valuations using the projected unit method. The assumptions that have the most significant effect on the results of valuations are those relating to the rate of return on investments and the rates of increases in earnings and pensions. The valuations referred to above for SSAP 24 accounting purposes assume that investment returns, net of management expenses, will exceed earnings growth by an average of at least 3.5% per annum. Present and future pensions are assumed to increase at an average of 2.6% per annum for SGPS and 2.5% per annum for the other defined benefit schemes.

(iii) Accounting for pensions under FRS 17 Under the transitional arrangements for the implementation of Financial Reporting Standard (‘‘FRS’’) 17, ‘‘Retirement Benefits’’, the Group continues to account for pensions in accordance with SSAP 24 as set out above. The additional disclosures required by FRS 17 are provided below. The calculations of FRS 17 disclosures have been based on the most recent actuarial valuations, which have been updated to 30 April 2003 by an independent professionally qualified actuary to take account of the requirements of FRS 17.

The main financial assumptions used by the actuary were as follows: 2003 2002 %%

Rate of increase in salaries 4.0 4.0 Rate of increase of pensions in payment ^ SGPS 2.3 2.3 ^ Other defined benefit schemes 2.5 2.5 Discount rate 5.5 6.1 Inflation 2.5 2.5

In applying FRS 17, the directors believe that the RPS schemes need to be considered separately. The directors understand that the Group has no rights or obligations in respect of the RPS schemes following the expiry of the South West Trains and Island Line franchises. Furthermore, the franchise payments in respect of the new South West Trains franchise to February 2007 take account of the cash cost of pension scheme funding during the franchise term. The amounts relating to the RPS schemes are separately highlighted on page 72.

71 Notes to the accounts 2003

Note 26 Guarantees and other financial commitments (continued)

(d) Pension commitments (continued)

The balance sheet amounts as at 30 April 2003 measured in accordance with the requirements of FRS 17 were as follows:

SGPS/Other RPS LGPS Total 2003 2002 2003 2002 2003 2002 2003 2002 »m »m »m »m »m »m »m »m

Total market value of assets 282.3 325.9 183.5 225.7 155.3 180.1 621.1 731.7 Present value of liabilities (449.1) (364.8) (218.2) (213.6) (211.7) (187.4) (879.0) (765.8)

Pension (liability)/asset before tax (166.8) (38.9) (34.7) 12.1 (56.4) (7.3) (257.9) (34.1) Related deferred tax asset/(liability) 50.1 11.7 10.4 (3.6) 16.9 2.2 77.4 10.3

Net pension (liability)/asset (116.7) (27.2) (24.3) 8.5 (39.5) (5.1) (180.5) (23.8)

The value of the assets in the schemes and the expected long-term rate of return as at 30 April were:

Rate of SGPS RPS LGPS Total return 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 (%) (%) »m »m »m »m »m »m »m »m

Equities 8.5 8.5 242.9 313.3 173.8 213.5 92.0 112.1 508.7 638.9 Bonds 5.3 5.9 Nil Nil 8.5 11.6 38.3 36.9 46.8 48.5 Other 5.7 6.5 39.4 12.6 1.2 0.6 25.0 31.1 65.6 44.3

282.3 325.9 183.5 225.7 155.3 180.1 621.1 731.7

If FRS 17 had been adopted, the amounts charged/(credited) to the profit and loss account would have been as follows: »m

Charge to operating profits ^ Current service cost 30.9 ^ Past service cost Nil

30.9

Finance (income)/cost ^ Expected return on assets (60.7) ^ Interest cost 48.1

(12.6)

The following amounts would have been included within the Group statement of recognised gains and losses (STRGL) under FRS 17: »m

Actual return less expected return on pension scheme assets (185.6) Experience gains and losses arising on the scheme liabilities 38.8 Changes in assumptions underlying the present value of the scheme liabilities (85.6)

Actuarial loss reported in STRGL (232.4)

Actuarial loss as a percentage of scheme assets and liabilities at 30 April 2003 were as follows: %

Actual return less expected return on pension scheme assets as a percentage of scheme assets (29.9%) Experience gains and losses arising on the scheme liabilities as a percentage of the present value of scheme liabilities 4.4% Total actuarial loss recognised in STRGL as a percentage of the present value of scheme liabilities (26.4%)

72 Notes to the accounts 2003

Note 26 Guarantees and other financial commitments (continued)

(d) Pension commitments (continued) The movement in deficit during the year under FRS 17 would have been: »m

Deficit in schemes at the beginning of the year (34.1) Movement in the year: Current service cost (30.9) Contributions 26.9 Other finance income 12.6 Actuarial loss (232.4)

Deficit in schemes at the end of the year (257.9)

If FRS 17 had been adopted in these financial statements, the Group’s consolidated net assets and profit and loss reserve at 30 April 2003 would have been as follows: Profit and loss reserve Net assets »m »m

As currently stated (77.3) 317.1 Net pension liability on FRS 17 basis (180.5) (180.5) SSAP 24 net pension asset that will reverse on implementation of FRS 17 (23.4) (23.4) Deferred tax related to SSAP 24 items 7.0 7.0 Adjustment to net interest in joint ventures (17.8) (17.8)

Net assets on FRS 17 basis (292.0) 102.4

(e) Contingent liabilities (i) The Group’s contingent liability for the full potential amount of deferred taxation on all timing differences is detailed in note 21. (ii) Certain of the Group’s properties are the subject of contractual obligations to pay a share of the open market value to the former owners but only on the occurrence of certain specified events. The periods of these contractual obligations lapse on various dates up until 2005. There are no intentions to dispose of any of these properties at 30 April 2003. (iii) A performance bond backed by an insurance arrangement for »20.9m (2002 ^ »20.9m), a season ticket bond backed by an insurance arrangement for »31.3m (2002 ^ »28.7) and a holding company guarantee of »21.0m (2002 ^ »21.0m) have been provided to the UK’s Strategic Rail Authority in support of the Group’s franchise obligations at South West Trains Limited at 30 April 2003. These contingent liabilities are not expected to crystallise. (iv) The Group and its joint venture have, in the normal course of business, entered into a number of long term supply contracts. The most significant of these relate to track, station and depot access facilities, together with new train lease and maintenance arrangements. (v) Under UK Rail franchise agreements, the Group and its joint venture have agreed with the UK’s Strategic Rail Authority annual amounts receivable or payable in respect of the operation of rail franchises for future periods. Under these agreements, there is a requirement to comply with a number of obligations. Failure to comply with these obligations would be a breach of the relevant franchise.

(f) Joint venture and associates Our share of commitments and contingent liabilities in joint venture and associates shown below are based on the latest statutory accounts of the relevant companies: Joint ventures Associates 2003 Total 2002 Total »m »m »m »m

Annual commitments under non-cancellable operating leases 73.1 0.4 73.5 69.1 Capital commitments 0.5 Nil 0.5 2.2 Franchise performance bonds 14.7 Nil 14.7 14.7 Bank guarantee Nil 2.4 2.4 3.1 Season ticket bond 1.2 Nil 1.2 1.2 Infrastructure investment commitments Nil 0.9 0.9 1.8

73 Notes to the accounts 2003

Note 26 Guarantees and other financial commitments (continued) (f) Joint venture and associates (continued) On 15 May 2003, West Coast Trains Limited (an indirect subsidiary of Virgin Rail Group Holdings Limited, the latter being classified as a joint venture in these accounts) initiated legal proceedings against ALSTOM in respect of a claim for liquidated damages and certain additional lease costs arising from the late delivery of ‘‘Pendolino’’ train sets which are being procured from ALSTOM in order to operate on the West Coast mainline. No account of any benefit from this claim has been included in the financial statements of Virgin Rail Group Holdings Limited or its subsidiary companies. ALSTOM itself has made claims for extensions of time to West Coast Trains Limited in the form of notices of potential delay as well as indicating that it is entitled to recover cost overruns. ALSTOM’s counterclaim has not been fully formulated or particularised and it is not yet possible to assess the merits of this counterclaim. On receipt of their formal claim, a more detailed examination can be undertaken.

Note 27 Related party transactions Transactions between Group companies that are fully eliminated on consolidation are not disclosed as permitted by FRS 8, ‘‘Related Party Disclosures’’. Transactions in which directors have had a material interest are disclosed in the Remuneration report on pages 30 to 34. At 30 April 2003, the Company had loan notes receivable of »10.0m (2002 ^ »10.0m) from Virgin Rail Group Limited. The Company earned interest of »1.0m (2002 ^ »1.0m) on the loan notes during the year. During the year, Keith Cochrane (up until his resignation on 21 July 2002), Graham Eccles and another member of the Group’s management were non-executive directors of Virgin Rail Group Holdings Limited. Fees of »25,000 (2002 ^ »25,000) were payable to the Group by Virgin Rail Group Holdings Limited in this regard. During the year, Brian Souter and Keith Cochrane (up until his resignation on 21 July 2002) and another member of the Group’s management were non-executive directors of Road King Infrastructure Limited. Fees of »35,981 (2002 ^ »33,795) were paid to the Group by Road King Infrastructure Limited in this regard.

Note 28 Post balance sheet events (i) Disposal of Citybus On 9 June 2003, the Group announced the disposal of Citybus to Delta Pearl Limited (‘‘the purchaser’’), a 100% indirect subsidiary of Chow Tai Fook Enterprises Limited, the privately owned company of the Cheng Yu Tung family and the major shareholder in New World Development Company Limited which in turn has an interest in New World First Bus Services Limited, one of Hong Kong’s major bus operators. The sale was completed on 23 June 2003. The gross consideration for the disposal is HK$2,200m. The net cash amount received was HK$1,646m, which represented the gross consideration less the amount of net third party debt as at 30 April 2003, being HK$554m. The purchaser assumed all of the net third party debt of Citybus. The purchaser also assumed capital commitments of approximately HK$239m relating mainly to the completion of a new depot for Citybus at Chaiwan in Hong Kong. Further details on the disposal were given in the Group’s announcement on 9 June 2003.

(ii) Disposal of businesses at Coach USA

Since 30 April 2003, the Group has announced the disposals of a number of parts of Coach USA in line with the restructuring plan for Coach USA announced in December 2002. The disposals announced were as follows: * On 6 June 2003, the Group announced that it had agreed terms for the sale of the South Central and West Regions of Coach USA to a newly formed affiliate of Kohlberg & Co., LLC. Completion of the transaction is subject to regulatory approval, final confirmation of financing and normal closing conditions. The gross consideration for the sale is US$155m, to be satisfied by cash of US$128.5m and an interest-bearing loan note receivable of US$26.5m repayable no later than 63 months from date of close. * On 2 June 2003, the Group announced that it had completed the sale to Peter Pan Bus Lines of the business and assets of the New England Region of Coach USA. The business has been sold for a consideration of US$40m, satisfied by cash of US$33m and loan notes receivable of US$5m and US$2m repayable after three years and four years respectively, both interest bearing. * On 22 May 2003, the Group announced that it had agreed terms for the sale to First Transit, a US subsidiary of First Group plc, of the business and assets of the Transit Division of Coach USA. The transaction is subject to normal commercial closing conditions, including approval from affected public authorities, with completion anticipated before 30 June 2003. The consideration for the transaction is US$22.5m, satisfied by cash. These transactions will not result in a material gain or loss on disposal in the consolidated accounts of Stagecoach Group plc. Further details on the disposals were given in the Group’s announcements of each disposal.

74 Shareholder information

Analysis of shareholders as at 30 April 2003

Range of holdings No. of holders % Shares held %

1 ^ 25,000 63,374 98.13 112,090,141 8.49 25,001 ^ 250,000 911 1.41 61,025,734 4.62 250,001 ^ 500,000 87 0.13 31,135,217 2.36 500,001 ^ 3,750,000 160 0.25 223,171,952 16.89 Over 3,750,000 50 0.08 893,522,968 67.64

64,582 100.00 1,320,946,012 100.00

Classification of shareholders No. of holders % Shares held %

Individuals 62,057 96.09 425,922,132 32.24 Other corporate bodies 74 0.11 9,689,593 0.73 Banks and Nominees 2,209 3.42 817,816,640 61.92 Insurance and assurance companies 1 0.00 152,616 0.01 Limited companies 231 0.36 67,157,356 5.08 Pension funds 10 0.02 207,675 0.02

64,582 100.00 1,320,946,012 100.00

Registrar and transfer office All administrative enquiries relating to shareholdings should, in the first instance, be directed to the Company’s registrar and clearly state the shareholder’s name and address. Please write to: Lloyds TSB Registrars Scotland, PO Box 28448, Finance House, Orchard Brae, Edinburgh EH4 1WQ. Telephone 0870 601 5366.

Stagecoach individual savings accounts The Company has appointed Halifax Share Dealing Limited as an ISA provider and shareholders who would like further information should contact their help desk on 08457 22 55 25.

The Company has also made arrangements with Stocktrade for Maxi and Mini ISAs. Full details and an application form are available from Stocktrade (a division of Brewin Dolphin), 10 George Street, Edinburgh EH2 2PZ. Telephone 0131 240 0448.

Low cost share dealing facility The Group has set up a low cost execution only share dealing facility with a division of Brewin Dolphin, Stocktrade, exclusive to Stagecoach shareholders. The commission is 0.6% up to »10,000 with 0.2% being charged on the excess thereafter, subject to a »15 minimum. Shareholders who would like further information should write to Stocktrade, PO Box 1076, 10 George Street, Edinburgh EH2 2PZ. Telephone 0845 601 0995, quoting dealing reference Low Co020. Postal dealing packs are available on request.

Payment of dividends by BACS Many shareholders have already arranged for dividends to be paid by mandate directly to their bank or building society account. The mandates enable the Company to pay dividends through the BACS (Bankers’ Automated Clearing Services) system. The benefit to shareholders of the BACS system is that the registrar posts the tax vouchers directly to them, whilst the dividend is credited on the payment date to the shareholder bank or building society account. Shareholders who wish to benefit from this service should request the Company’s registrar (address above) to send them a dividend/interest mandate form or alternatively complete the mandate form attached to the next dividend tax voucher they receive.

Dividend Re-Investment Plan The Company operates a Dividend Re-Investment Plan which allows a shareholder’s cash dividend to be used to buy Stagecoach shares at favourable commission rates. Shareholders who would like further information should telephone LLoyds TSB Registrars Scotland on 0870 241 3018.

75 Five year financial summary

2003 2002 2001** 2000* 1999 »m »m »m »m »m

Results Total turnover 2,076.6 2,114.4 2,083.5 2,179.1 1,548.4 Operating (loss)/profit (466.2) 96.5 (268.8) 198.6 274.9 Finance charges (net) (33.5) (59.8) (76.0) (144.6) (61.0) (Loss)/profit before tax (500.2) 42.0 (335.2) 255.3 210.4 Tax charge (25.0) (15.0) (19.1) (50.1) (60.5) (Loss)/profit attributable to ordinary shareholders (525.2) 27.0 (354.3) 205.2 150.0

Net assets Fixed assets 1,259.8 1,981.0 2,047.3 2,304.1 2,107.6 Net current (liabilities)/assets (49.2) (40.4) (109.1) 250.8 (189.9) Long term creditors (640.7) (808.1) (816.8) (1,039.4) (950.8) Provisions (252.8) (223.4) (201.1) (192.9) (374.8)

Tangible fixed assets Additions 71.1 103.3 141.8 376.7 263.1 Depreciation (105.3) (112.7) (111.2) (218.7) (186.0)

Cash and debt Cash at bank and in hand 164.7 150.0 160.4 816.0 321.8 Gross debt (724.7) (924.6) (946.1) (1,365.6) (1,226.7) Securitised debt (included within gross debt) Nil Nil Nil Nil (482.7) Net debt (560.0) (774.6) (785.7) (549.6) (904.9)

Cash flow Free cash flow 217.8 184.3 228.1 283.9 279.8

Ratios Earnings per share` 6.4p 6.3p 7.5p 12.8p 11.9p Dividends per ordinary share 2.6p 2.6p 3.8p 3.6p 3.0p

Free cash flow per ordinary share 16.6p 14.1p 17.0p 18.9p 21.2p

Shares in issue at year end 1,320.9m 1,320.9m 1,318.6m 1,407.0m 1,382.5m

Average number of employees 38,876 38,783 40,002 41,254 31,920

*2001 and 2000 have been restated following adoption of FRS 19 1999 summary information has been restated following adoption of FRS 15 and FRS 19 `before goodwill amortisation and exceptional items

76 Registered office and advisers

Company Secretary Derek Scott Merchant Bankers Principal Bankers Noble Grossart Limited Bank of Scotland Registered Office 48 Queen Street New Uberior House 10 Dunkeld Road Edinburgh EH2 3NH 11 Earl Grey Street Perth PH1 5TW Edinburgh EH3 9BN Telephone +44 (0) 1738 442 111 Auditors The Royal Bank of Scotland plc Facsimile +44 (0) 1738 643 648 PricewaterhouseCoopers LLP 24/25 St Andrew Square Email [email protected] Kintyre House Edinburgh EH2 1AS 209 West George Street Company number SC 100764 Glasgow G2 2LW Solicitors Shepherd & Wedderburn, WS Registrars Stockbrokers Saltire Court Lloyds TSB Registrars Scotland Credit Suisse First Boston (Europe) Limited 20 Castle Terrace PO Box 28448 1 Cabot Square Edinburgh EH1 2ET Finance House London E14 4QJ Orchard Brae Herbert Smith Edinburgh EH4 1WQ Exchange House Telephone +44 (0) 870 601 5366 Primrose Street London EC2A 2HS

Financial Calendar

Annual General Meeting 29 August 2003

Final Dividend 8 October 2003

Interim Report December 2003

Interim Dividend March 2004

Road King Infrastructure Limited

Company websites www.stagecoachgroup.com www.stagecoach.co.nz www.stagecoachbus.com www.island-line.co.uk www.southwesttrains.co.uk www.supertram.com

Designed by McKinstrie Wilde, Edinburgh. Principal Photography by Jeremy Hardie. Printed by Pillans & Waddies, Edinburgh. www.coachusa.com www.virgintrains.co.uk nulRpr 2003 Report Annual Annual Report 2003

Group Headquarters 10 Dunkeld Road Perth PH1 5TW Scotland T +44 (0) 1738 442 111 F +44 (0) 1738 643 648 www.stagecoachgroup.com